Perhaps for the first time, a stockbroker, who benefits from your trading activity, is sharing concerns about customers trading in risky products. If you are a trader in the stock market looking to make fast money, it is a wrong expectation.
In a business update published last week, Nithin Kamath, chief executive officer at Zerodha, the biggest stockbroker in India by market share, said that less than 1% of those who actively trade equity futures and options generate returns higher than bank fixed deposits or 7% annually.
The brokerage has promised to release more granular information in the next few weeks. Such an initiative must be welcomed. It will only strengthen awareness about risks associated with daily stock market trading.
It is very uncommon for a stockbroker to caution existing and prospective customers as it hurts their business. The more you trade, the more money brokers make through every transaction. This note of caution goes against that.
We knew it all along. Stock market trading alone cannot be your ideal wealth-creation tool. Buying and selling shares is a zero-sum game. Anyone who has spent time in a dealing room would endorse it. There is an underlying difference between stock market trading and stock market investing.
Many people get attracted by the publicity people make on social media about trading profits. It is difficult to make money instantly as stock market trading requires you to learn the right skills. That applies to investing too. You cannot only rely on your ability to buy low and sell high to create wealth in the short-term. You can get wealthy only if you give your money enough time to grow.
Your risk appetite
There is nothing to stop you from believing and working for wealth creation. It is your fundamental right to ensure your financial well-being and that of your loved ones. However, risk needs to be constantly assessed as you do so. Your ability to take risks in the equity markets depends on your ability to generate future income. There is a strange dichotomy in the argument.
You need a guaranteed source of income for you to take up risky trading positions. That also matters when you have to select the right stocks while investing. Ideally, your future income should be an independent source. That could be your inheritance or savings accumulated over the years combined with your current income.
However, you cannot be an active trader in your spare time. Stock market trading cannot be a part-time activity. You must have skin in the game to be a part of the less than 1% traders who generate a higher return than inflation.
If your future income depends on your stock market trading and investment activity, you need to be even more cautious. You cannot put your money at risk through trading strategies that could lead to significant losses.
The most considerable risk is when you borrow to fund your trading strategies. Borrowing to trade can be dangerous for individuals. “Leverage carries huge risks and should be avoided by most, especially retail investors,” admits Kamath in his note.
Currently, Zerodha does not offer a margin trading facility. However, he also states that competitive pressure could push the company to have that feature sooner than later. Kamath promises, though, that it would not lure people into borrowing.
Value and growth investing
If you do not have the stomach for losses, avoid any trading activity in the stock market. A simple way towards wealth generation for most individuals is to ‘get rich slow’. Famous American investor Warren Buffett once said that nobody wants to do that. Everyone wants to get rich quickly. He is a proponent of value investing. He loves to buy when everyone sells and sell when everyone buys. However, knowing the right time is anything but easy.
You can simply look at future growth prospects for businesses and invest in them regularly. That could be directly or indirectly through index funds or mutual funds. Regular investing through the rupee-cost-averaging method can go a long way in generating wealth.
Rajas Kelkar
(The author is editor-in-chief at www.moneyminute.in)