Top 4 Myths And Facts About Indian Stock Market Exposed

With reference to the stock market, one can say there are group people who are very much involved and dependent on the stock market, day in and day out. They earn their bread and butter from the stock market. Their whole family depends on the earnings they get from the stock market.

Then there are other groups of people who invest in stock market to increase their wealth. Their principle income is either through jobs or business. For them, share purchase is just an investment vehicle.

Apart from these groups, there are others who do not have much knowledge about the stock market. They think it is a mysterious place, where there is a lot of shouting going on and sometimes there is a lot of jubilation or despair going on. People shouting here and there and signaling one another. The common man is unaware of what is going on inside the stock market. Let take a look at Indian stock market overview and myths surrounding it.

Myths and Facts

  1. Place only for the rich and famous

This is one of the most typical myths that a stock market is a place where only rich and famous personalities put their money. Or only those people who have hordes of money can invest in stock market. Once all your paperwork and registration is complete then you can start purchasing stocks, which you can sell it at an appropriate time to make a profit. Share prices are in a range from few rupees to thousands. Similarly, the quantity that you can purchase is from one share to hundreds to thousands to lacs depending on your pocket.

One can start purchasing shares with an as small amount as one hundred rupees and can purchase any day whenever one wishes during working hours. There is no minimum fixed level for stock investment.

  1. Nothing more than gambling

This is one of the biggest myths that keep investors at bay from approaching stock market. This notion persists with investors or the common man who have no knowledge regarding the difference between gambling and the stock market.

Gambling is pure luck game. Luck can favor you sometimes but cannot favor you all the time. A stock market is about speculation. Speculation is an investment in real estate or stocks or in commodity, in the hope of gain but with a risk of loss. Your ability to purchase/sell right stocks at right time and at the right price so as to profit or loss from it. Luck has virtually no role to play. One can also minimize risk to an extent by taking into consideration certain points. One can take calculated and timely decisions so that risk of loss is less and gain from profit is more.

It is true that many people have riches to rags story in the stock market. It was not because of being unlucky, but because of greed and over expectations. Similarly, it is also true that there are rags to riches story in the stock market. It was not because of being lucky, but because of patience, calculated and timely decisions.

  1. High price shares will fall and low price shares will rise.

This is also one of the widespread myths that share price which are high today will one day fall and share prices which are low today will one day rise. Actually, those share which are overpriced/underpriced because of rumors, misjudgment, and other things, will on correction of the market will fall/rise. But if a company is potentially strong its price will not fall and those company which is weak, its prices will never rise.

Many factors and ratios are considered while evaluating company’s share price. There were moments when Sensex was at 8000 pts (also at different points) and people said the bubble will burst. But you know where it is today.

  1. Trading can be done without understanding.

There is a myth that stock trading is nothing but buying and selling of shares. People do jobs or business like an accountant, carpenter, plumber, designer, etc.  They gain requisite knowledge over a period of time. While on learning path they face difficulties which they resolve and learn from their problems and shortcomings.

Same thing applies in the stock market. Little understanding is not enough for trading. One does gain knowledge when one is involved, what to be done and what not to be done, observing business tricks of the trades, logical reasoning, applying common sense, calculating, studying patterns and charts, analyzing financial statements, handling difficult situation, figuring out what went wrong and how to correct it and move ahead. This way trading will be more successful and profitable.

How To Avoid Share Buying And Selling Mistakes?

People often make mistakes buying and selling shares. It is a part and parcel of the learning process. But the prevalence of common sense while buying and selling share separates a successful and a failed trader. Be it experienced or inexperienced all have made mistakes because they at the critical movements have not used their common sense.

How To Avoid Share Buying And Selling Mistakes

Nobody can be 100 percent sure or perfect, but knowing some common investing mistakes, traders can avoid losses, especially a huge one. Let us look at Indian stock market overview and also some of the most common buying/selling mistakes

  1. Irrelevant tips

It is often seen that people purchase shares just because some friend or relative purchased it or have recommended it, that these stocks will give high returns because the company is coming out with extraordinary new or innovative product that will sweep the market. Even though this news may be true but it is not necessarily it is a next big thing, and you accumulate the shares in huge quantity.

Even you can see commercial TV channels beaming views expressed by share consultants that have recommended to buy/sell of a particular company. It may turn out that they are paid to break such a news so that prices rise / fall. And once you buy /sell share prices will fall/rise. A point here is you are not the only one watching that particular channel. There are thousands out there viewing the same channel as yours. They are nothing more than speculative talks.

Though few stock tips are accompanied by logic, reasoning, analysis, and calculations, and may come true. One can depend on these types of tips or recommendations. It is better to take these with your personal common sense and research. Research about the promoters, take opinion from other unbiased traders.

  1. Cheap Stocks

Usually, people buy/sell shares by analyzing them by the criteria of 52 weeks high / low. They use this as thumb rule that is, to purchase stocks which are trending towards its 52 weeks low, so that they will now rise. Or sell stocks which are trending towards 52 weeks high, as there will not be much chance of appreciation. There may be a reason for company’s share price appreciated or depreciated depending upon the conditions at that time of the year. It is not necessary that those conditions may be same this year too. One should analyze the reason of rise or fall of a price before coming to any conclusion.

Change of CEO, competition conditions, company’s fundamentals and other conditions at that time of the year affect the price of shares at that time which at present time may not be true or viable. It is important to view all these factors why prices are low, it may give a false buy signal.

One should buy shares of a company which you think will have a sustainable growth path. Don’t purchase just because they are available cheap. What if the company is unable to recover from its losses? You might lose your investment then.

  1. Non-holistic approach

When buying stock, one should not look through only one angle but should take the holistic view. One should go through the fundamental and technical analysis of the company. In this fast-changing world certain companies may be in great demand presently but after a lapse of time, they may be outdated. Pagers were quit in demand but within a period of one and a half year as soon as mobile was launched, pagers discarded suddenly. One should also see that will the emerging industry will last long enough, when you wish to go in for long time investment.

Best Indian Stock Market Tips For Beginners

Money lures one and all. Big and easy money lures more and more people like a Pied Piper. This lure of big money brings people to the stock market. But let me clarify you must be aware about Indian stock market overview to make money.

Many people have lost their entire life savings and are debt-ridden. Their greed has brought them on the verge of or have committed suicide. The other side of the coin is that few have made good money too.

Indian Stock Market

Let’s see the others few who have made good money, who had patience, done a lot of research, solid understanding of the market, and had disciplined way of trading.

Market volatility is one of its inbuilt characteristics. New investors are in a state of confusion during this volatility period, should they hold, sell or buy the shares.

Market swings (up or down) are impossible to predict. But there are some rules and cycles if followed, then probabilities of good returns are high.

 

  1. Surplus funds.

One should only use surplus funds that one has and it should not create an unbearable financial loss if in case he loses, fully or partially that amount in share market. In present market condition though chances of losing are very less because huge data is available on the internet to satisfy one’s analysis. But still, there are chances ( the risk factor associated). Best thing is to invest 10% of your surplus funds regularly and whenever gain is made, book profit over a period of time.

  1. Diversification.

One should diversify his investments (spreading risk) by investing in small-caps, mid-caps, and large-cap companies. Every segment has different returns and volatility. One can also diversify on bases of sectors (bank, IT, metal, pharma, FMCG,) as some sectors perform better due to favorable government policies or announcement. One can diversify on basis of thematic indices (commodities, energy, MNC, PSU).

Diversifying investment in different ways helps to reduce the risk factor of your investment. But too much diversifying can have a bad effect on your returns as they will go out of control. You will not be able to take proper advantage.

  1. Expectations.

Multi-bagger stocks are those stocks which have given unimaginable returns over a long period of time. There are tens of thousands of shares. Out of which only a handful have given unimaginable returns. And also only in the bull phase of the market. It is very very difficult to figure out which “unknown” stocks will give these type of returns.

We always hope that the stocks we have give the best returns, but practically it is not so. We should not have unrealistic returns of any stock. One should know at the maximum how much return our stock will give in future, say few years down the line. Warren Buffett said that one can expect 12 percent returns. Above it is just luck. If your expectation is more than that, one is just inviting trouble. One cannot be lucky each and every time.

  1. Known business.

It is better to invest in a company whose business you understand and have knowledge about, like transportation, textiles, automobiles, paper, electronics etc. In this way, you can figure out how much return you can expect the business can give practically.

  1. Keep the tab on news.

World news does affect our stock market (in a positive and negative way). And ultimately our share prices move up and down. One should always track Indian and world news regarding what is happening in different parts of the world. Change in government policies, rules, an outcome of meetings held, mergers and acquisitions, company announcements, financial results and business related news on regular basis. This will help you in knowing which shares to purchase and sell.

What are the different types of investment risk?

Dictionary meaning of risk is the situation involving exposure to danger, the likelihood of something going against as planned. Before we talk about what are different types of investment risk, they are broadly classified as systematic (huge coverage) and unsystematic one (specific coverage).

investment risk

Systematic risk is applicable to the entire market place. Whatever be the type of investment they come with some in-built risk. Like war or war like situation, an untimely collapse of government etc. The whole market may collapse and it is not possible to protect one’s portfolio from it. Even if one diversifies his holdings he cannot escape the market downfall.

Unsystematic is a specific risk. It affects particular segments of the market, or specific company or specific sector or industry. Like losing a lawsuit, strike by employees, etc. being specific to a certain company. One can control the loss by diversifying investments in portfolio by way of investing into another company or sector.

Apart from these above two broad classifications, there are certain specific types which an investor should know.

  1. Inflation Risk

The real return on your investments gets eroded because of high inflation. If inflation is too high then real returns on your investments can be negative too. In short, your returns should beat inflation by a big margin.

If you invest in FD and get 8% interest per year. And if inflation is 5% then your real return is 3%. But if you invest some financial product where you get 12% return per year than you beat inflation by 7%. In short better the rates of return less susceptible you are towards inflation risk.

  1. Market Risk

Value of your investment may fall due to market risk factors. They can be equity risk (stock market risk), interest rate risk (interest rate fluctuation), currency risk (fluctuation in currency vis-a-vis another currency), and commodity risk (fluctuating in commodity prices)

  1. Credit risk

It is a risk of debt obligation not met. A person or a company who has taken credit from you are unable to pay interest or is unable to return your principal amount.

Government bonds purchased usually has lowest credit risk. In other words investments in government bonds, you are sure to get your investment back along with interest (almost sure but not 100% sure) Though private companies have just a little bit higher credit risk.

Before investing one should check the company’s credit rating by knowing its standing, by reputed rating agencies like CRISIL or CARE or ICRA.

Even banks fixed deposit has some credit risk. In case bank liquidates one will get back the maximum of Rs. 1 Lac as guaranteed by the government.

  1. Country Risk

When ever a country (like Greece) is unable to keep its debt obligations that is defaults its payments, its effects other countries with which it has financial relations and bonds, mutual fund, shares and other financial investment are affected.

Underdeveloped and to some extent developing countries are more at risk as compared to developed ones.

The above risk can be at the micro level (individual) or macro level (country) but they are sure to affect your investments, usually in long run. So it is better that before investing in any financial instruments we should take the risk involved in our investment into account.

How to minimize your share trading risk?

We can define risk as the possibility of loss or a situation which involves such a possibility. Risk and rewards, in other words, means how much is the risk that we can take against the rewards we will possibly get.

We all know that while trading in the stock market we are taking risk of our money when we are buying/selling shares of any company. We may lose some or most part of our money (if stock prices go south) or we may profit (if stock prices go north). There are many examples that people have lost huge amount and have committed suicide and also have gained huge amount and are leading a luxurious life. A tale of rags to riches and also a tale of riches to rags.

minimize share trading risk

We can control our risk if we play it in a calculated manner.  Along with evaluating pros and cons of a company whose shares we purchase and along with calculating ratios and analyzing trends with facts and figures we should also apply common sense tricks or tips. Usually, successful traders are those who win more number of chances than losing. One has to manage his risk so that he wins more than he loses.

There are certain principals or rules if applied properly and diligently can manage risk more properly. Tilling the scales more towards winning side.

  1. Begin with a small amount. It is better to begin trading with a small amount. It is an amount which you lose will not make any dent in your financial life. In other words one should start trading with a small amount of the total capital one is ready to invest in future. We can call it a rehearsal or trailer of a three-hour film. One should start in such a way that one can bear initial few losses in a row. It is said man proposes and God disposes. So it is not that every thing will go exactly according to your plans. Your risk amount should not be more than 5 percent of your capital invested in a single particular trade.
  1. Always use a stop loss. Always use stop loss as soon as you purchase a share. It helps in minimizing your losses. Say you purchased a certain share at Rs. 100/- and are holding for certain period of time. You can order stop loss at Rs. 90/- (10 % SL). If share prices decrease from 100 to 95 to 90. Once they reach Rs. 90/- you better sell it (taking 10 % as your loss). If your appetite for risk is higher you can go in for 15% SL. It is not wise decision to undertake uncomfortably large risk, especially in the initial stages. It is better not to trade in futures and options as fall in prices can be 15 to 20 percent within a matter of few hours.
  1. Exit script upon mistake. Everyone makes mistakes. So once you realize that you have made a mistake while purchasing a script, it is better that you exit that script as soon as possible. It is not possible to manage your loss. If you think you can manage your loss you will fall more in the loss trap trying to cover your previous loss. If you are using margin money for trading then losses and gain will both be exponential. During loss better not to wait for margin call, and quit.
  1. En-cash bad trades. Certain laggards remain to be laggards no matter what. Good performers do have their bad times or setback but they recover from their set back faster. Once you plan to sell off your bad trades see to it that you sell those shares first which have not performed well for a considerable period of time.
  1. Sometimes cash is better. Usually, when the market is having free fall it is better not to stay traded. Cash in hand is a position one should take if a market is continuously having a downward trend. Once downward trend stabilizes start your purchase. Better to have cash in hand than to lose by trading.