by Dr. Nabanita Ghosh, FCMA
Dates back to centuries the journey of the stock market started, yet still in the technologically intervened society spasm of losing money continues. Investors and traders who can be ratified in the definitional bracket miserably failed to prove their real time worth due to multiplicity of factors. History says since 1400 till date the stock market investment lies in the routine dream plan but with or without aiming towards actualization. Dutch East India Company is the first trading company who continued the monopoly movement in the first modern stock trading platform in Amsterdam in 1611. During the 1700s, the daily buy-sell habit of stocks and bonds of a group of merchants, the executors of Buttonwood Agreement paved the way for the birth of the New York stock exchange. In 1790, the Philadelphia stock exchange spurred the development of the US financial sector, again in 1896 the most popular Dow Jones industrial average came into force. In 1923, the S&P 500 was initialized with the assistance of Henry Barnum Poor’s company. The US markets roared nearly for 20 years and in 1929 the crash was observed due to the participation of the speculators. S & P joined hands with Standard Statistics and made its first official footprints in 1941. In the meantime, in 1971, the National Association of Security Dealers Automated Quotation (NASDAQ) also came up. The phase wise development of the stock exchanges did not bring stability of investors’ earnings though added to the market liquidity. The concept of investing in the stock market with an objective of maximising the return subject to the minimization of risk is not understood in real terms. The investment remained confined in a few cases only in the lines of intensity of showcasing the financial affordability but the propensity to learn the same to reap the hidden benefits while earning is non-existent. Herd behaviour in the markets is one of the vital causes for the duplication of the adverse outcomes and investors’ persistent irrational behaviours becomes contagious resultantly. Stock market return is a function of the forces of demand and supply but the investors attempt to generate stupendous return by unnecessarily creating a disequilibrium in the system. Both the instances of information-oriented herding and also the reputation-oriented herding distorted the stability of the revenue from the investment. The investors are emerging from diverse backgrounds, the pinnacle of return from investment rests on the optimum selection of the individual stock/portfolio which should not be based only on the risk-return profile but also on the strength of a complete Economic-Industry-Company analysis. But times immemorial the investors abandon the idea of doing so with alacrity.
The common myths in stock market investment are numerous and to quote a few are: considering the investment as Gambling, market timing, creating a portfolio with correlated stocks, equi-proportional set-offs, wealth creation as an objective, buying drowning stocks. Building the portfolio by making substantial investments in small and mid-caps and allocating negligible funds for the big caps will not escape from the list of misconceptions in stock market investment. There prevails in the stock market a tendency of magical transformation of investor to trader without realizing the difference between the two. As the investment consumes much more time to be ripe, impatience and quick learning objectives derail them and trading patterns get activated.
The commonality of these myths can be attributed to the disconnection of the investment analysis, lack of interest to capture the nitty-gritty of the investment techniques. Owning funds does not translate the investment into safe returns. As per the literature of behavioural finance investors are ignorant of the science of investment and more prominently, they get fascinated by the whims and fancies of investment of their peers who also might not have entered into the niche investment segment. The meaning of investor is truly separated from that of arbitrageur, speculator and gambler. An investor is expected to be a person with sound knowledge of investment policies and strategies in addition to the requisite available investible funds. On the other side there are groups of investors who are majorly dependent on the desk trading support services and cases are evident where their investment fallacies proved to be disastrous as the traders are also equipped with zero to low investment skills and tactics. Investment out of hard-earned money or by using spare funds demand active management policies. Investment depends on the various demographic factors, namely age, occupation, social status and objective of investment. In addition to all these also comes the timeline for the concerned investment. The investors’ need varies across the verticals and therefore the strategies for each individual investment cannot be frame-worthy for all. The uniqueness of investment should be valued duly. The online and offline investment workshops organized for the novice investors may sometimes turn out to be futile due to the incapability of deciphering the knowledge shared by the technical experts and also at times on the unwillingness and inefficiency of applying the acquired knowledge to achieve their determined investment goals. Awareness of the company-based information both qualitative and quantitative needs to be maintained apart from the market statistics. The quicker and easy steps to reach the target is to make a vigorous observation of chart analysis to predict the market movement but this prediction also sometimes gets diluted and disproportionate due to the involvement of unknown and uncertain macro or both micro factors.
The investors for the cash and equity market differ from the players in futures and options. Former is termed to be a long-term player and the latter is having time bound positions. The short-term changes are always not reflected in the investment for the first category and whereas for the second category even the minute short term fluctuations are captured in the price movement. The market sentiment can be best understood by choosing the platform offering mock trading/investing opportunities which in other ways render hands-on-experience before taking the most favourite investment of one. Beginning with a decent investment amount would also help to absorb the market anomalies and the balance funds can be utilized for repairing the unintentional mistakes committed in the investment. Again, the investment is not preferred to be planned out of usable funds or borrowed funds as the returns are not universally secured and there comes a question to bridge the gap of financial commitments and volume of returns generated. Selection of stocks are made to build a portfolio but not only for the diversification criteria but also the double verification is called for the correlativity of the chosen stocks. Investors need to bring a sync with the funds available for investment with the knowledge of investment avenues and its estimated returns and whereas the traders are basically connected with day to day returns on investment, lows and highs of the investment. To create more resilience in the market the investors and/or traders need to learn to overcome the market imperfections and the steady source of incomes for a long term can be ensured by promising to a correct selection of stock, avoiding the herd behaviour, learning the art and architecture of investment and also on the judicious allocation of fund for the right stock at the right time.
About the Author:
Dr. Nabanita Ghosh, FCMA, quality-oriented academician, performing in teaching and mentoring since 2007. Derives the pleasure in inculcating a passion towards learning, searching for unknown and researching for known. Beside professional pursuits, also takes keen interest in self-composition in mother tongue [ Bengali] and English and also bagged awards and appreciations to the credit.