Stock market cycles are a joy ride if you play them right. However, a lot of new investors enter the market at the top of the cycle. Share prices take a tumble from there, and many are left high and dry. They vow not to return and stay invested in fixed deposits. Almost 80 per cent of stock market trading accounts managed by stockbrokers in India are dormant, meaning they barely witness any trade during a year. A lot of you sold mutual funds lately and began buying shares directly from the market.
Stock market data indicates that domestic mutual funds and insurance companies have been net sellers in the market in July 2020. At the same time, the retail or non-institutional participation is at a new high. It means the buying and selling activity in the stock market from individuals has increased.
If you put it together with the surge in small-cap shares that have outperformed benchmarks like S&P BSE Sensex and NSE Nifty, it presents a worrying trend.It appears that individuals are participating with an idea to make the most of the opportunity in the stock market. They are probably reading and discussing stocks with friends or friendly advisors. There is nothing wrong with that if it is a regular strategy to consult friends or advisors. However, the timing of their increased participation is worrying.
Low price doesn’t mean cheap
There is a lot of activity in shares that are trading below `10. That does not mean they are cheap. They are selling at a low price because they are reporting poor financial performance. Many such shares are listed in the Z category by the Bombay Stock Exchange.
There are reasons why a company’s shares are put in the Z category. These companies have failed to
adhere to the stock exchange’s listing requirements or have not resolved investor complaints, among other things. In common man’s language, they are called ‘buyer beware’ shares. Despite that, the
trading activity in these shares is rising. There is a tendency to make quick money. It is a dangerous game, and you could lose money as quickly as you make it.
A lot of risks in the market
Uncertainty lingers over businesses across the board due to the pandemic and the aftermath. Many are
unable to make any projections on the trajectory of future profit growth. The Reserve Bank of India committee that sets borrowing rates for us did not project the economic growth or inflation. That has happened for the second straight meeting.
That means there is uncertainty over interest rates and also on the profitabil-ity of businesses. The fixed income, as well as equity markets, are affected as a result. World over, there are concerns over the prospect of the US dollar since America keeps borrowing more and more. An indicator of that concern is the dramatic surge in gold prices. There is no high demand for jewellery or industrial application in
India or China. Prices are rising because investors see uncertainty ahead.
No such thing as ‘quick money’
You cannot put your hard-earned money into something for a fast buck. That is a myth. No matter what you hear. Your money needs time to grow. It would help if you had patience and temperament to let it be. You can’t decide the timing of the harvest of the fruits. Your job is to nurture the tree with the right nutrients and patience. It is essential to set aside a portion of your income into regular savings and investing.
A steady investment through systematic investment plans into the stock market over 10-15 years is the right approach. For the new demat account holders, you must use this opportunity to start a SIP in an index exchange-traded fund. If you insist on buying shares, try systematic investing in quality shares. Companies that have superior fundamentals and an ability to survive and sustain during the present round of uncertainty.
There are reasons why a company’s shares are put in the Z category. These companies have failed to adhere to the stock exchange’s listing requirements or have not resolved investor complaints.
(The author is editor-in-chief at www.moneyminute.in)