The Demystification Of The Stock Market

All of us are well acquainted with the strange ways of the stock market. Taking the Indian stock market for example, we are well aware of the volatility being shown by the Sensex. One day it rises beyond expectations and we are audience to exhilarated brokers and investors congratulating each other and distributing sweets, the next day it crashes and we read about brokers and investors committing suicides.  Then also people do not loose faith and continue to put there hard earned mullah in it. What is so attractive about it? Do people consider it as a shortest route of making some quick bucks?  Why does it continue to lure investors? Why is it so unpredictable and risky? And if it is so risky and volatile what is the need to gamble ones money?

The stock market or the secondary market pre dominantly deals in equity shares. It provides the best platform to shareholders to sell their holdings readily and thereby ensuring liquidity.  The investors can also continuously rearrange their assets if they so desire by divesting themselves of their holdings while others if interested can use their surplus funds to acquire them. The price offered has to be mutually satisfactory.  It runs on the concept of Demand and Supply. If a company whose share is listed on that stock exchange announces favorable news like good profits or a strategic collaboration or acquisition , it gives a message that it will make more profits in future so everybody want a share in the pie and are interested in buying the share of that company. The person already holding its share can either hold it for future gains or sell it at a desirable higher price and make profit instantly, the vice versa happens in case of bad news. Not only by company fundamentals, is the stock market also affected by international and national economic and political upheavals.

There is a need to understand the behavior of the market.  When the stock market is rising, the investors become greedy and feel that it will rise further and they can make more profits. The market tempts the investors towards a higher risk strategy with a promise of higher returns. The higher the market goes, the greater the temptation which investors face to abandon the principles that they have been following in their investment policy in the past and increase their level of risk. Yet, time and again it has been proved that higher the market goes, the lower the incremental return is likely to become for the extra risk being assumed and more are the chances of subsequent setback that postpones the reward. Similarly when the market is sliding, the investors fear that it will fall further. Hence they are not ready to take risks. They again change their investment strategy and become more risk averse. The history has shown that the lower the market goes, the greater the returns in prospect in due course. In this way the stock market lures the investors to buy at the top and terrorize to sell at the bottom.

When the market is not instilling the feelings of greed or fear in the investors’ mind, it plays on their vanity. At the level of asset allocation, the market asks the investor to choose among various economies, cycles of economic growth and inflation, determine the course of currencies and interpret the trend of political events. At the level of stock selection, it invites the investor to form a view of broad industrial trends around the world and assess the strengths and weaknesses of thousands of companies at home and abroad.
The market seeks pleasure in confronting investors with the fact that they are often wrong, tempting them in to abandoning the investment strategies being followed by them. As soon as they are detached from their fundamental principles of investment they find themselves entangled in the web of greed and fear making the market more volatile than ever before.

So in order to prevent oneself from falling prey to fear or greed, one should have realistic expectations about what can be achieved by the stock market. The next step should be to appoint an investment manager having in depth and comprehensive knowledge of the various aspects of the market. The investment manager should have a persuasive methodology for investing. It is important to leave the manager to apply the methodology over a period of three to five years without seeking to influence policy very much unless the investment objectives change.  The relationship between the investor and the investment manager should be of mutual trust and goodwill.

By being cautious in approach and seeking experts help, the investors can protect themselves against the potentially damaging emotions which the stock market can unleash.

Ms. Puja Garg
Senior Lecturer
College of Management Studies