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Tuesday, 11 June 2013
Is stock market movement making you a trader?
I know many traders who were investors once upon a time. But they did not remain investors for long. Mesmerized by inexplicable movements in the stock market, they could not retain their status as investors. The titillation of making money with the help of these movements simply overwhelmed them. Their journey from investors to traders was rather strange, defying logic of natural growth. These investors, who later on became traders, actually started their journey as a small step in equity market. Most of them had their baptism by their friends who encouraged them to invest in equity. Some even joined the race of making quick bucks in equity markets by reading newspapers or watching television channels. Rumours and tips also had their say in pulling them into the market.
No matter what made them enter equity market, most of them were driven by feedback that they got through different sources, regarding potential of equity market to generate quick returns. The influence of peer group behavior in this case was extremely strong. Looking at colleagues in the office who remained glued to online portal, these investors also thought of trying their luck. This was the stage when seeds of greed were sown. The greed, which later on went on to dominate the logic of investment and overwhelmed these investors. Once they had started investing they were also helped by occasional good experiences that these investors had when they got better than anticipated return on some stocks. For a first time investor in equity, the previous benchmark of return was around 8 percent to 9 percent as most of the bank deposits and investment instruments like PPF and NSC provide this kind of return only.
Now the same investor who was used to 8 to 9 percent return suddenly found himself confused as his first investment in equity gave him 6 percent return in just two days because of favourable market condition for a particular stock. However, he got good returns in some other stocks as well which were too good to be true and was based on the randomness rather than any logic or study. What will be the impact of this experience on the mind of the investor? The impact obviously will have two dimensions. One it will make an investor feel that he is an expert and understands the pulse of the market. After all, his judgment had gone right. So the natural desire to invest more in equity market will increase. Two, this will build a mindset that equity is a route to make quick buck and it is better to be a trader than investor because if good returns can be generated in a short period of time, there is no point in remaining an investor. Who will like to wait for long term when money can be made just like that? Actually, this is the stage when a gullible investor is most likely to get converted into trader. And practically this is what happens. Investors turn into traders only to curse equity market for the so-called evils that it has.
Once an investor becomes traders, a series of wrong decisions follow. As a trader he will start buying stocks which are meant are speculative in nature and are not driven by business potential. After investment if the investor makes loss, he will start averaging so that when the stock price goes up he will be able to reduce the loss. But in most of the cases it does not happen. If the loss continues, he will wait for next source of cash inflow like salary and invest more in the same stock. At this stage sometimes it becomes difficult to differentiate between trader and gambler, because by now investment decisions get completely driven by theory of probability which is at the core of gambling.
One of the most unfortunate for an investor who has turned into trader in stock market is that he stops looking at value and starts believing in rumors. Penny stock and stocks driven by tips become his favourite investment decision. This is when the bitter experiences of equity market become his companion and his dislike for equity market starts. Very often, these traders leave equity market forever. This means end of an opportunity for wealth creation forever. Some of them, who don’t leave, continue to lose money. It is very important that an investor does not lured by the market and gives up the temptation of making quick money. Stock market is after all not a casino though some of its traits may show it to be one.
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