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 used 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 rulesays – “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 practising 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.
[The article has been written by Abhijeet Prabhu. He is presently pursuing his PGDBM from SIMSREE, Mumbai and is a passionate writer and social worker.][/sociallocker]