5 Myths about Equity Market is based on my understanding of Equity Market so far. It is important to bust any myth as it is responsible for wrong decision making. In the mind of an average Indian there is a fear of Equity Markets. It can be correlated to an example from our daily lives. Last week, i along with my friends went for a short holiday. We planned for swimming in the morning. One of them had Aquaphobia i.e. fear of water. Though we tried our best to convince him to join us but of no use. Now the reason for Aquaphobia can be loosely correlated to the fact that he does not know how to SWIM. Considering the same example, we fear Equity Market because we don’t know how to invest in Equity Market. In few cases, we fear the volatility of Equity Market. To overcome the fear, it is important to bust the myths attached to equity investment. In one of my post, i discussed 5 Financial Planning Myths. This post is dedicated to Equity Market.
5 Myths about Equity Market
1. No one can earn in Equity Market: It’s a myth. In fact, my father told me that till date he has not seen anyone making fortunes in Equity Market. Let me put it differently that Equity Market is a Zero Sum Game. Person A’s LOSS is Person B’s GAIN. As such Equity Market does not create any fortunes. We can safely assume that if 100 people are investing in Equity Market then broadly half of them will lose and balance half will gain. Though this statement is more relevant on volume front i.e. if 100 shares are traded then the probability of gain or loss is equal. Whether you are on winning side or losing side, it is decided when you enter and exit the market. In short, it’s all about timing. Trust me, once you understand the rule of the game then no one can stop you from being a millionaire. Though i am still in learning phase but just to share an example. I bought 1000 shares of Dishman Pharma at Rs 190. It touched Rs 210 and because of greed i retained for more profit. It dropped to Rs 198 and i was sulking on my decision. Today, when it touched Rs 205, i sold and booked my profit. The share closed at around Rs 199. Now, i booked my profit but assuming Investor A who bought from me at Rs 205 sold at Rs 199 and booked loss of Rs 6 per share. In this case, by trading we keep passing profit/loss to other investors. The loss of Investor A is my gain. It’s all about timing.
2. Equity Market is sheer Luck: Again its a myth that you can gain in equity market from luck. At the macro level, i shared in my post, Fundamental vs Technical Analysis of a Stock, the types of stock analysis parameters. If you buy any stock based on Stock Tips by 3rd parties then i completely agree that Equity Market is sheer LUCK. Stock Market Tips is a flourishing business which i explained how it works. Trust me the recommendations of analysts is a fluke and based on a trend. The best example is Coal India which i am tracking from Rs 380. In 1st run up, it touched Rs 420 and everyone started giving BUY call. Then it dropped to Rs 400 and there was silence. After that, it touched Rs 440 and then again i saw a flood of BUY recommendations. I sold it during the 2nd rally and now it collapsed to Rs 415. As i shared in my post 7 Blunders of Equity Investment that you should avoid PSU stocks to generate returns better than NIFTY. Though i mentioned that COAL India is an exception, but it can be a pension stock. It is very defensive stock and the gestation period is too long. Recently, i changed my gears and sold this stock to release the capital for more aggressive options.
3. Long-term Investment in Equity Market: In my opinion, it’s a myth. As i keep mentioning that volatility in Equity Market is at its peak and will increase in future. One peculiar trend which is emerging is that Equity Market is now more stock specific rather broad based. Even on a day when NIFTY fall, investors make money by investing in right stocks. To summarize, if you are an active investor then you invest in Equity Market else mutual fund is the place for you. Reason being, you should cash the opportunities available in the market due to volatility. Gone are the days when a sneeze of Infosys or RIL created ripples in the market. Now no one cares. For long-term investment in equity, you can invest in Mutual Funds rather direct exposure in Equity Market.
4. Trading/Demat Account of a Bank is the BEST: It’s a myth that Trading and Demat account provided by the bank is the BEST. Investors who trade very frequently can understand the pain of High Brokerage. Please understand that Brokerage eats into your profit. Most of the investors prefer trading and demat from their existing bank or full-service broker. A bank or full-service broker does not add any value. Assuming you invest 1 lac for trading purpose and rotate it frequently. Though the amount is small but assuming you bought and sell shares worth 1 lac 3 times in a month. Normally the brokerage is 0.5% of the traded value therefore if you buy & sell one time then brokerage will be approx 1% of 1 lac i.e. Rs 1000. If you traded 3 times then Rs 3000 will be brokerage for 1 month. Assuming the average portfolio of Rs 10 lac, a brokerage can be anywhere between Rs 20,000 to Rs 30,000. It will eat into your profit in Equity Market.
Recently i shifted to one of the discount brokers. In the same example, 3 buy sell trades of 1 lac in a month, the brokerage will be Rs 120 i.e. Rs 20 per trade and total 6 trades. Therefore, savings of Rs 880 per lac with an assumption of frequent trading. All broking house including discount brokers are registered with SEBI, therefore, need not worry on the safety of funds. Moreover, not many people are aware that all demat accounts are from either of 2 depositories i.e. NSDL or CDSL. Therefore, it does not make any difference whether demat account is from bank, full-service broker or discount broker. Your demat account will be either with NSDL or CDSL.
5. Equity Market is only for Young People: Again it’s a myth. From a financial planning perspective, your portfolio’s equity component should be 100 minus your age. If my age is 35 then my equity exposure should be 100 – 35 = 65% of total portfolio. Now it’s my choice whether i invest as an active investor or passive investor in Equity Market. Based on same logic, i convinced my father to invest 35% of his portfolio in Equity Market.
Disclaimer: Among all the stocks discussed in this post, i don’t have a position in any of the Stocks. The objective of this post is only to create an awareness.and educating investors about the Subject matter. The views and opinion expressed on this website are my personal views and is NOT an investment advice/Stock Tips whether to buy, sell or hold the shares of a particular stock. All investors are advised to consult their investment advisor and/or conduct their own independent research into an individual stocks before making any decision. I am not responsible for any loss or implications arising out of any decision taken by the readers after reading my post.
Copyright © Nitin Bhatia. All Rights Reserved.
Share this Post: