“I was listening to one of the business news channels the other day where the experts were discussing as to which stock to buy and which stock to sell”, said Apurva. We had met after a long time to discuss on stock markets. We had discussed about what are stocks and reason for their existence, things to know before one starts investing in stock market, the trade life cycle and different approaches to investing. Apurva had all geared up to get her hands dirty and wanted to invest in stock market actually.
“So
why would these experts give their views to everyone just like that , I mean if
they know how a stock would perform assuming that they have done fundamental or
technical analysis or both why would not they go ahead and do it for their
personal benefit, why would they give such important information to all ?”,
Apurva looked confused.
“Every
expert would tell you that his advice to you is nothing but just an opinion and
you need use your own intellectual ability before you take any decision”, I
started explaining her. It is not possible that these experts would have
information which is material and non-public and even if they do they cannot disclose
it under the insider trading norms. It is just that they help you put information
into prospects which is meaningful and logical to help you take decision. But
it is equally true that the information which is public is already figured into
the stock price to a larger extend the moment it becomes public.
At
times, these experts from unaccountable sources and Tip providers can also give
you wrong advice deliberately to influence the stock price. It is true that for
any stock, majority of the ownership is with promoters and institutional
investors and retail investors have limited influence to put significant
pressure on stock prices but it certainly help set a trend and creates a market
sentiment. For example if an institutional investor want to buy significant
chunk in particular stock, they would like to create an environment so that
they get the stock at cheapest price possible.
For
simplicity consider the following example. If an institutional investor wants
to buy 10 million stocks of a Company “A” for which they have positive outlook,
which is currently at 100. But it is interesting as to how they will go about
it. They would not buy all 10 million stocks together. They would first buy 2 million
stocks. But they would not get all 2 million stocks at 100 because as they buy
these stock these would make demand stronger and the stock price would
increase. Let’s say they manage to buy the stock at average of 103 with current
price increasing to 105. Now the real game starts. Through these unaccountable sources
and tip providers, sell sentiment is created for this stock which puts downward
pressure on stock. It is logical to think that this will put the institutional investors
at loss.
But
reality is different, these institutional investors start selling their stocks.
As they sell the stocks it puts downward pressure, the retail investors get
anxious and start selling their stocks as well. Institutional investors manage
to sell the stock at the average price of 98 which gets them loss of 10 million
but the damage is already done. The stock price of stock reaches 92. They can also create the similar impact in the market by selling the Stock Future or Put Option at higher price. It means they do not need to hold stocks to create artificial selling pressure.Always remember that the impact on
downward trend is more than the upward trend as the retail investors are risk
averse and have biased towards falling price. Now that the price is at 92 the
institutional investor would buy 10 million stocks which would be average around
97 making stock price around 102. Had they gone for buying 10 million stocks
when stock price was 100 their average would have been 106 vs 97 which is what
they got eventually saving 90 million. If we subtract the 10 million loss, this
saved them 80 million. The figures in this case are hypothetical for simplicity
but this is how it works!
As
per an independent study conducted, Indian stock investors had more than 60%
chance of making profit in the last five years assuming that they chose their
stocks randomly. In a survey it was found that more than 90% retail investors
had lost their money during the same period. Most of these investors had taken
tips or professional help from one or multiple sources. As per the study if we
remove extremely good and bad performers in stock market over the past 5 years index
shares have given annualized 25% return.
This works like a
virus and below are vaccines that will help you stay away from diseases
- Chances of making profit in the stock market improves drastically
if you just avoid tips from unaccountable sources.
- Average profit made by stocks is always higher than average loss
made by them. Hence, dividing the money across multiple stocks will
increase the chance of overall profit.
- Restricting your investment within Top 500 stocks improves chance
of making profit as well as rate of return. If you do not like to review
your stocks periodically then it is better to restrict yourself to index
stocks.
- A random year may give very bad return in the stock market. Always enter the market with a long term perspective.
“Oh
this Tips(y) virus is very dangerous and thank you for giving me these vaccines
at early stage of investment journey”, said Apurva and we concluded our
discussion for that day.
Source:
Independent study was conducted by Bazar Analysis Research.
Please
refer to the highlights of the Study and other stats at
