For Beginners and Women
This article is based on the seminar delivered to a set of keen learners looking for a right of passage into the stock market.
The phrase ‘Breaking the ice’ is often used in context to another person, so why use it for the 'Stock Market'. The word market invokes the sense of a ‘place’ where two parties may go to buy and sell a common item- Well, the term 'Stock Market' is an over simplification in that sense. In addition to it being the common ground for parties to buy and sell stocks we cannot deny the complex sentimental interaction of the million participants sitting behind computer screens and making decisions without any direct negotiation or even knowing the counter party.
This complexity has given birth to a personality unique to the market. It is formed as a result of millions of psyches interacting with each other in a binary capacity of 'buying' and 'selling'. The notorious aspect of this personality is well known to all of us, we refer to it as the ‘Market Risk’ , more on this later.
Let's begin by understanding the complex mechanism of stock market. Just like a vehicle has different parts to help it have a body, some movement and efficiency, similarly stock market has participants. Let's draw some parallels to put things into perspective:
Retail investors- They are way more in number than any other entity in the market. However, they weigh less in total capital or 'mass', but, they are key to allow the 'big parts' of the stock market (the institutional investors) in moving their holdings. The retail investors are equivalent to the screws, nuts and bolts in a vehicle. Institutional investors – Less in total number but very high in capital and power aka mass in our parallelism. They are equivalent to the big parts of the vehicle, without them the machine wouldn’t have a body to work with.
Scalpers/arbitrageurs- Low in total number, moderate in mass, and very important in improving the functionality of the stock market. They are the lubricant of the vehicle. Their functioning is important to keep prices efficient as they exhaust price disparity of any sort.
Regulators, depository participants, brokers- Traffic police, garage and chauffer for the whole vehicle. They are external entities but their presence is important to ensure quality and operational efficiency.
With that short and simple introduction to the stock market let us move on to answering few related questions
Why is Investing Important?
It is important to understand that the answer to this question changes with surrounding circumstances and economic conditions overtime. The importance of investing has grown exponentially from the late 1990s when the fixed deposit for over 5 years would offer over 11% interest per annum and inflation was in the range 3.3% to 7.2% with tax rate more lenient than what they are now.
Today, investing is about survival. Not only has the interest rate come down from astronomical heights to mere 5%, they are also taxable at the rate of 30%, and when combined with inflation, fixed deposit today burns money effectively. Yes, you read that right. The real value of your money reduces over time when kept as fixed deposit because it no longer fulfills the basic necessity of beating inflation.
This is also a contributing factor to the ever growing wealth gap. The rich are constantly figuring out ways to beat inflation, engaging in more sophisticated investment techniques to avoid paying taxes, while the poor and middle class continue to rely heavily on fixed deposit and other long term lock-in investment schemes which given lower than inflation returns, effectively eroding thier wealth. So while the rich make money on their earned money, the poor lose what little they earn, therefore making the rich, richer and the poor, poorer.
This brings us to the next question,
Where does investing begin?
I always tell my members that investing is a journey, and not a destination. When you start, you are bound to get lost a few times before you learn how to navigate the turns. There is no pre decided roadmap to this journey of investing, only signs and guidance, it is never ending, and your future generations will pick up investing where you leave it. It is a lifestyle you choose and adopt, not a fling thing.
The art of investing does not begin with you opening a trading account, or creating a bank savings account dedicated to investing, nor with the participation and commitment to any scheme. Investing begins in your mind first.
To win the game of investing or trading, as the case maybe, you must first commit to the mental challenge involved and get ready for the mindset shift that is warranted. It is no longer the question- 'whether investing is for you or whether you are cut out for investing'. It is now about – What is it that you need to change in the way you think, act, behave, feel, react to become successful in the art and science of investing.
An important concept to stay on top of is Market Risk. You have heard this often but may not understand the consequence implied by this terminology.
Many people come to the stock market with a small corpus of Rs. 10,000 , Rs. 20,000, 1 lakh and wish for Rs. 10,000 income every month or doubling the money in 3 months. When I say they come with a small corpus, I do not mean in absolute terms but relative to their expectations. They do not understand the whole concept of Market Risk but are lured by stories of rags to riches.
If you ever went for a hike into a dense forest, you would prepare for some obvious threats like animal attacks, ditches, insect bites, coconut falling on your head and so on. You would want to avoid these risks. So, as a result you would have a strategy to tackle these situations and have provisions for unexpected or unpredicted problems. This is market risk. It is a summation of all problems which you cannot predict but should expect in addition to the problems which you know exist and will have predicted. It is the threat of the unknown, unpredicted event which can wipe out capital like spit on the pavement.
Moving on to the last question-
What makes investing a journey and not a destination?
We mentioned inflation, taxes on everything already. These negative elements are not going anywhere. Every paisa you earn is continuously subjected to diminishing real value and taxation. Considering the negative forces are never at ease, your money should not be deprived of the growth opportunity either. Therefore investing profitably is no longer an option.
Consistency is the key.
Anything that is required to be done consistently, is automatically a journey.
This is all a beginner needs to know to have a mindset ready for the stock market.
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