Stock Market investment is the riskiest and most rewarding among all financial products. Stock Market is too sensitive. Little information regarding the economy, industry, policies, management, contracts or any other factor which will affect the earning of the company would create a positive or negative sentiment and thus get reflected in the share prices. Fundamentally, Stock market hardly face a liquidity risk (Depends on individual company’s stock trading), but it is too sensitive. It is the fluctuations in the share prices and dividend percentages that create risk. Business entity again a very risky thing as nobody can decide the fate or predict the future of it. All these makes stock market a highly unpredictable thing. This uncertainty is the risk.
It’s the greed that influence your neighbor to buy shares of Apple inc. with a hope to gain 2-3% in few hours and sell in evening so that he can have more money tomorrow to speculate. Well, soon, you will be informed by your neighbor that you must have good luck to make money in stock market or you may find new neighbor in that house as previous is bankrupt now. I have heard my father to say negative things about share market all the time as he grew up watching the people losing their hard earned money in stock market. People will say you must be lucky to perform better in stock market as god knows what will happen to stock prices another day.
On the other hand, there are considerable numbers of people who have built their entire fortune over stock market. Warren Buffett, a man who is being considered among the richest persons on the earth would say, “Risk comes from not knowing what you are doing.” He would say someone should have an understanding regarding value of the company, its products/services and business model before they invest in any business. What makes these people lose their money? Warren Buffett would say, “It is the lack of patience and greed that makes you lose.”
Here come the best lines by Peter Lynch, “It’s easy to forget sometimes, share is not a lottery ticket, it’s a part ownership of a business”
Stock market is different in eyes of people with different perception. Some call it money making gambling machine, while some call it a cool way to invest in businesses. Some would say in order to earn higher return, you must bear higher risk. What legendry investors believe is that in order to earn higher return you don’t have to bear higher risk all the time especially in stock market. What you need is well disciplined investment in fundamentally good company having cheap stock price without greed or fear. It’s the fear that makes people to sell out the stocks to save them from further loss when they see the negative red percentages in their portfolio in short term.
On the other hand, I have seen many imbeciles who sell out the stocks very early in the greed of booking the profit and later on regretting over their decision of selling it very early when the stock price rises substantially after selling. Another mistake people do frequently is buying a stock by watching their past performance and rising of the prices in past few days. Fools get enchanted by two fold returns the stock achieved in few days and get into the game when stock is at its peak.
Volatility is not the risk. I would never calculate beta to find out the risk of any business. People make money in the stock market just because it’s volatile and not rational. The fluctuations in the stock market is the product of sentiments that people express very frequently. The technology is allowing traders to play flip flop to gain more and more within short period of time. People who play with patience and ignore the fluctuations that are for very short terms and have nothing to do with the fundamentals of the company ultimately make thousand fold return by remain invested for very long period of time. Investment in a company having robust fundamental for long period of time will surely provide an immense return.
If you compare stock investment with other financial products like Bank FD, ELSS, Insurance, government & corporate bonds, REIT, other debt instruments which are very safe to invest, you would get to know that stock investment is highly risky. But before calling only volatility a risk, let me get into the fundamental comparative study. All the instruments which are safe and provide fix percentage of return come with a biggest risk of not beating out the inflation percentage. Stock is the only way to safeguard yourself from inflation as generally businesses pass on the inflation effect to their customers by increasing the prices for products or services they are offering.
In stock investment returns are very high and sometimes unimaginable. I have seen many people to change their fortune by creating thousand fold returns by remain invested for very long period of time. If you compare tax wise, there would be no tax on capital gain if you hold the shares more than a period of one year. Moreover, it is highly liquid financial product compare to fixed deposits and real estate.
So, stock investment is a very risky thing undoubtedly when you blindly speculate for the easy money. Risk is when you leverage your investment by taking debt or investing in derivative products only with a view to speculate. I from your savings and remain invested for period of time till you get pessimist about the company’s future without regretting your decision of selling if price rises later on.
POINTS TO BE NOTED
- Do homework before you invest. Read about business and its product well before you invest.
- Make sure that the stock you are going to buy is cheap and you have good understanding about the business model, revenue model and product of the company
- Invest according to your financial profile. Invest the amount of money that you will not require in at least next two years.
- Stay invested. Avoid short term fluctuations. Avoid noises.
- Do not get into the stock market because you have retained cash. Wait for the ball to come in your circle of competence.