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Take the bull by the horns

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The fear of risk should not keep silvers away from investing in the stock market, says Priya Desai

I was walking past the Bombay Stock Exchange (BSE) in Mumbai’s Fort area recently with a friend, when he noticed the massive bull sculpture in front of the building. “Just like the Nandi outside a Shiva temple, what is the bull doing here?” he asked, rather mischievously.

Animal farm terminology

Animal farm terminology such as bulls and bears, pigs and chickens, is common in stock exchange parlance. Once you start investing in the stock/equity market, you undoubtedly hear about the market being in the grip of bulls or bears. A bull in the stock market is an optimistic investor who expects stock prices to move in the upward direction. Favourable factors for a bullish market are a high growth rate of the economy, growing investment and profitability in the corporate sector, good monsoons, and controlled inflation. These result in a positive sentiment in the share market, with stock prices seeing a rapid upward move. As witnessed recently, the bull phase may not necessarily last long.

With increased integration of the Indian and global economies, international factors weigh in majorly on our stock markets. The sharp slide in oil prices, debt problems in European economies, and slow growth in America and China recently have brought a massive slide in our stock prices. Analysts have now started talking of a bear market phase.

My 64 year-old friend had a pertinent doubt. “Do you think that at my age I should invest in the stock market, and to what extent?”

Investing in the stock market

The rule of thumb decrees that equity investment of silvers should not exceed the difference between 100 and their age. For example, if your age is 70 years, your equity investment should be limited to 30 per cent of your total assets. This rule no more holds water as the financial world and the outlook of silvers have undergone a sea change during the past two decades.

Silvers are more open to diversifying their asset base now. As investments in fixed deposits and bonds earn a fixed annual income with no change in the capital invested, they become a low-reward, low-risk financial instrument. On the other hand, stocks continuously change hands in the stock market during working hours (9 am to 3.30 pm), with prices fluctuating daily. Equities, called stocks or shares in popular parlance, are important investment instruments.

An investment in equity means investing in a company that is listed on the stock exchanges. Our major stock exchanges are the National Stock Exchange (NSE) and the BSE. Buying and selling equities needs to be preceded with opening a Demat account with brokerage houses, their franchisees, nationalised banks and private-sector banks.

When a stock is dematted, it loses its physical form, and selling and buying is done through this account by way of credit and debit. The financial credit or debit can be passed through the bank account linked to the Demat account. This virtual system has eased the process of buying and selling of stocks.

Computer-savvy silvers can carry on share market transactions independently, sitting in the quiet comfort of their homes. They simply need to register for electronic trading (e-trading) with a brokerage house and use netbanking for payment and receipt of money by linking their trading account to a bank account. The brokerage charges for e-trading accounts are significantly lower.

The movements in stock prices during business hours can be monitored on channels such as CNBC18, ET Now, Bloomberg, Zee Business, etc. For additional information, financial newspapers can be checked.

Gain and loss

Fluctuations in the buy and sell prices of shares open up many windows of opportunities, with a chance to earn money. For instance, when a stock is bought at ₹ 100 and sold at a higher rate of ₹ 150, an investor earns ₹ 50 per share. If he has invested ₹ 10,000 in buying 100 shares, he makes a profit of ₹ 5,000 in the period of buy and sell. Brokers charge brokerage per share, along with the taxes. You gain the rest of the profit. The reverse also holds true. A loss occurs when the buying price of a share is higher than the sale price.

In a nutshell, any investment in the stock market intrinsically involves risk and/or reward. The result depends upon the investor’s understanding of the ebb and tide, knowledge of the factors that affect a market at a point in time and that particular stock, and the strategy adopted as well as the timing.

For one, I find Benjamin Franklin’s advice apt: “When it comes to investing, nothing will pay off more than educating yourself. Do the necessary research, study and analysis before making any investment decision.”

It is said that there is no place for emotions in the stock market; it may peak and trough based on sentiment, but an investor will have to be cool-headed. One must also develop patience and wait for an opportune time to maximise gain and minimise loss. A successful investor in the stock market is one whose total gain is larger than the total loss. Rare is an investor who has always made only gain or only loss; gain and loss are the two sides of the coin every investor has to face some time or the other.

Holding shares

A variety of listed stocks—large, medium and small caps—is available for investors. The market is generally affected by the movement in large cap stocks, as these stocks have a major weight in the stock indices like BSE (Sensex) and NSE (Nifty) index which are an aggregate indicator of movement in stock prices.

The stocks included in the calculation of Sensex and Nifty are termed index stocks and keep changing depending on market capitalisation. Movement in the prices of these stocks measures the movement of indices. But during a rally in the stock market, the prices of medium and small stocks move faster than even the large caps.

Investors can hold stocks for the long, medium or even the short term. When a stock is held for a year or over, it is called long term and gains and losses from buy-sell operations of such a stock are termed as long-term gains or losses. Medium and short-term cover a period of less than a year. Gains or losses arising from stocks held for less than a year are called short-term gains and losses.

Tax implications

This differentiation of short and long-term is important for tax calculation. While filing tax returns, short-term gains are taxed at 15 per cent, while long-term gains are tax-free. Therefore, long-term capital gains are a useful tax avoidance instrument. Losses can be offset against gains and tax payment can be reduced to that extent. Investors use this provision to minimise tax payment on short-term gains.

An investor can build a portfolio of long, medium and short-term stocks depending upon holding capacity. It is also observed that conservative investors prefer to hold stocks for a long term, extending even up to 20 years or more. On the other hand, enterprising investors keep restructuring their portfolio on a regular basis to take advantage of fluctuations in the market. Brokerage houses, too, suggest portfolio-restructuring strategies to investors.

Timing purchase and sell

There is no single mantra that offers clear-cut guidelines on the level at which buying and selling should be done. Stock markets are influenced by many factors. Developments in the domestic market are relatively easy to understand and keep track of.

  • For example, as the Budget is announced in February, it results in wide gyrations in the market on a daily basis during the month.
  • Fluctuations are intensified when global events create positive or negative sentiments.
  • Adding fuel to the fire are the quarterly results of listed companies that make markets move in an erratic manner.
  • Whenever there is a rise in issues related to European countries’ debt problems and the possibility of a break-up of the European Union, our stock markets dip heavily.
  • If the Federal Reserve of the US increases interest rates, the markets tumble.
  • When China’s stock markets had to be closed on account of their internal problems, our markets experienced a free fall of 1,600 points in the Sensex in just a single day.

There is no clear consensus as to why a stock market rises and falls. Till a couple of months ago, we witnessed signs of a bullish market. However, we now seem to be in the grip of a bearish market. Even the most seasoned analysts seem to go wrong by a wide margin in their predictions about the stock market.

“What goes up comes down,” says a popular adage. Simply put, when you feel there is a fair margin of profits, sell the stocks you are holding and buy them again at prices where the risk is limited. Just as loss is possible, so is profit. Warren Buffet puts it succinctly: “I will tell you how to become rich. Close the door. Be fearful when others are greedy. Be greedy when others are fearful.”

The author is an economist based in Mumbai

Photograph by iStock
Featured in Harmony — Celebrate Age Magazine
March 2016