Wednesday, 25 August, 2010

Why we ought to depend on our own research

Why we ought to depend on our own research

Just came across an article in an old Business Line giving some info about the limited number of people who virtually control our markets in India:
  • As many as 451 client identities accounted for about 50 per cent of the average daily turnover in the cash equity segment of the National Stock Exchange in the first quarter this fiscal. This was stated by the Minister of State for Finance, Mr Namo Narain Meena, in a written reply to question posed by Mr Sukhdev Singh Dhindsa in the Rajya Sabha.
  • The number is even more intriguing in the derivatives segment, with only 106 clients accounting for 50 per cent of the average daily turnover.
What are the implications for lesser mortals like you and me who invest in shares? Here are some of my thoughts:
  • First, these few persons, through their sheer weight, can take a share up or down by a significant percentage in a short span of time
  • Secondly, they don't give advance notice to you and me about their planned course of action
  • Therefore, we ought to be aware about the fact that a sudden spurt or tanking of an index or, more likely, a specific share can very well be exclusively due to market actions by these limited number of persons.
  • Accordingly, before we decide to buy or sell a share, we must do our own research rather than depending on:
    • Research recommendations
    • Tips
    • Rumours
    • Sudden and / or violent movement in prices
  • Most importantly, retail investors must very clearly understand the risk involved in investing in equity and take care of themselves by:
    • doing meticulous research PERSONALLY before making investment decisions
    • knowing our own risk appetite
    • adhering to our asset allocation strategies meticuously
    • limiting leverage to the extent to which we are ready to lose 100% of the capital that is deployed in derivative and / margin products
    • having a long term orientation while investing in shares
    • using very strict stop losses in accordance with our actual risk appetite
    • being willing to book profits the moment our targets are reached
      • irrespective of the time horizon
      • and whether or not the stock continues to move further in the predicted direction
    • not being too greedy - If you are getting anything more than twice the return on safe bank deposits, it is either too risky or you've just been lucky. 
Take care and happy investing!


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