In the ongoing pandemic-ravaged time, millions of first-time investors have boarded the equity (share) markets and most of them are youngsters in the age group of 18 to 35. It’s even interesting to see students showing an appetite to invest in a small way in a cross section of shares to reap benefits of the surging markets.
Data from National Securities Depository Limited and Central Depository Services, the two national depositories for securities, shows that the number of active demote accounts held by domestic individuals in India is increasing exponentially. While in FY19, active demat accounts grew by 3.8 million, in FY21 it grew by 14.1 million. In the first quarter of FY22 alone, this further grew by 7.1 million, indicating an annual expected growth of at least 28.4 million if this average rate holds up.
I have been regularly receiving emails from most of the local beginners in the share market showing keenness to know the dynamics of investing in shares. The queries raised by these local amateur investors reveal that they are still struggling to catch hold of even basics of the market. Most of them are yet to understand the difference between an investor and a trader. Despite struggling to fall in line with the dynamics of the markets, they don’t hesitate to park more and more money in the various stocks.
It was surprising to know that most of these new entrants were engaged in trading shares through several trading /investment apps and using state-of-the-art technology-driven platforms to buy and sell shares. As most of them don’t have a concept of difference between an investor and a trader, they bank heavily on trading to reap the profits. Today, online share trading is a fastest growing business.
Even as the integration of technology in the stock market has revolutionised the access of amateur traders to the market anytime and anywhere, it has at the same time proved a two-edged sword. Precisely, there’s much greater accessibility to the markets and people are simultaneously getting hurt faster.
However, it’s important for the people who have now started sailing in the equity markets to fish quick profits, to understand that being an investor is entirely different from being a trader in the share market.
You are a trader when you buy a stock because you feel like making profits out of the price movement of the stock. You sell and buy stocks without having real interest in the company behind the stock. As a trader your focus is entirely on the performance of the stock rather than the company behind the stock and don’t hold them for a long time.
If you buy shares on the basis of performance of the company believing long term growth potential, then you are an investor. Here the goal of investing is to gradually build wealth over an extended period of time through the buying and holding of a portfolio of varied stocks for a period of years, taking advantage of bonuses like interest, dividends and stock-splits along the way.
Notably, market dynamics suggest either be a trader or an investor. Don’t be both with the same stock.
Meanwhile, new investors, who are active but lack adequate knowledge about the share market, need to understand certain basic things about this marketplace. Here are some questions which stand answered for the convenience of these raw investors and also for those who are intending to enter the market for the first time.
Why there’s need to open a separate trading account, when you have a demat account?
Demat account is merely an account in which you keep your shares or equities holding in an electronic form. There is not much to do as far as operating the demat account is concerned. For trading of your holding, whatever you have, it is necessary to simultaneously open a trading account. In fact there’s a relationship between the trading account and demat account and the bank account.
To buy shares, the first step is to transfer money from your bank account to a trading account. The shares that you buy will be stored in the demat account. When you sell, your trading account takes back the shares from your demat account and sells them in the stock market and gets back the money. If you want your money back into your bank account, you have to give a request online to the broker to transfer it to your bank account.
What is the mechanism of trading shares?
Trading of stocks has undergone a sea change. Gone are the days when the trading through stock brokers was done personally or through telephones. Confusion used to loom large owing to either faulty phone lines or miss communication resulting sometimes heavy loss to the investors. So the trading was full of practical problems.
With the advent of information technology and its integration into the stock market operations, the stock trading got a new life which removed almost all the bottlenecks. The trading with online access is very expedient. Now stock traders have online access to a variety of tools and research to guide them smartly in buying and selling of stocks. The brokers give online access to the investor, which means they can enjoy trading in shares from their convenient location – be it home or work place.
It’s most important to make yourself thoroughly acquainted with stock market basics. Learn fundamental analysis and technical analysis. Market experts say that with good trading systems and strategies along with the use of good software you can excel as an outstanding trader.
What is compulsive share trading?
If you find yourself unable to control online stock trading coupled with emotional, financial and social consequences mounting, then that’s not a passion for trading. It’s simply an addiction. In order to clear yourself as not a trading addict, you should ask yourself a few questions? Do you enjoy the challenge of trading even more than making money? Are you a big risk-taker? Are you willing to put large sums of money on a few stocks, depending on margins and on other credit lines for investing? Do you resort to bigger risks to erase your losses? Is it that the first thing you do when you get up and the last thing before you go to sleep is check the position of your stocks? Do you bet large portions of your investment portfolio on a few stocks?
If your answer to these questions is affirmative, then treat yourself as a victim of online trading addiction. Precisely, it’s an illness.
I haven’t seen people talking about this kind of affliction, but the addicts suffering from uncontrollable online stock trading are no less serious than what ails the gambler who can’t stay away from gambling. While talking in the local context, I have seen online traders here who do nothing else but remain busy in trading stocks and their tendencies are of a compulsive gambler.
Notably, the situation here is alarming as compulsive online traders are overwhelmingly young and are big risk-takers and trade heavily on margin (using money borrowed from their brokerage).
How can you deal with addictive trading?
First and foremost thing is to identify yourself as an online trading addict. Then the next step is harder, as you need to acknowledge that you need help for de-addiction. Don’t hesitate to seek help. However, it’s possible that once you identify yourself as a trading addict, you can help yourself in the self de-addiction process through will power. Further, stepping away from the stock market for some period and divorcing the market specific news as much as possible will strengthen effective dealing with addictive trading. Let me share a useful tip borrowed from one of my acquaintances who was himself suffering from trading illness. He says – “The next time you lose money in a trade, call it day. Go, do something else, and live to trade another day.”
Besides, we need a group of counselors, mostly those who were addictive traders, lost lots of money and somehow managed to come out of the addiction. These self-de-addicted traders can prove fruitful counselors. Because they have tales of sufferings to tell, as they ‘believe they were not merely trading shares but gambling their own money’.
(Inputs from market experts are acknowledged)
Disclaimer: The views and opinions expressed in this article are the personal opinions of the author. The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK