In early 2020, when the fear of Covid pandemic triggered a massive selling across global markets, many believed it’s going to take decades to recover the lost wealth. To their surprise, the market has bounced back rapidly turning millions of people into millionaires and over 500 new billionaires emerging out of market during the pandemic.
Although it might look minting money in stocks is so easy, but there are many who get broke and bankrupt due to their bad choices in the markets. So, clearly… Success in stock market is not a walk in the park, at the same time it’s not an enigma code when you look at those millions and billions being milked out of it.
To break the enigma, let’s understand what is stock market first.
Understanding what stock market is
In simple terms, Stock market is venue (digital) where the stocks or shares of businesses are bought and sold at exchanges through stockbrokers, with the whole ecosystem being governed by Exchange regulating bodies.
Let’s try to understand the whole concept by comparing the stock market to a grocery store. The product in the grocery store can be assumed as a stock/ share and the manufacturer as the business/company that share belongs to.
The Securities & exchanges regulating bodies can be related to the price regulating authorities and the store as a stock exchange where the commodities are listed for sale. A stockbroker in this case would be a salesperson or someone from store, facilitating us to complete the purchase of the grocery item.
Why do people buy stocks?
It is evident that people buy to sell those later to make some profit, with the mantra being ‘Buy low Sell high’. But there are some other reasons to buy a stock. Let’s look at them one by one:
- Price Appreciation
The most popular reason why most people buy stocks is price appreciation i.e., the increase in value in price of the individual share and this happens in short term with any good news related to the company or could be a hype but in long term it’s only the company’s profitability and good management that results in price appreciation.
- Dividends
When a company declares it’s quarterly profits, some companies would want to reward their shareholders from the profits gained by dividing some of the profit with all outstanding shares. This is called a dividend.
Dividend is not a mandatory thing to do for a company, but completely a company’s management’s decision.
Dividends are generally low amounts and unless you hold a very high quantity it’s unlikely to see any overwhelming gains coming out of dividends.
- Tax Benefit
The dividend income or capital gains up on selling stocks are taxed at a much lower rate compared to other sources of income in some parts of the world.
So, wealthier section tends to rely heavily on stock markets to reduce their taxes while becoming wealthier simultaneously.
- Stock Ownership and Voting rights
Almost no retail investor looks to buy a stock to be proud to be part of owning a business and participating in the company’s decision through their voting rights which they get up on buying stocks but there are certain whale investors buy huge percentage of shares to have active voting rights to make their opinion count within the management of the company.
Understanding the logic behind stock market
To understand the logic behind the share market, we need to understand the mindset of a buyer and that of a seller. An investor would be buying a stock only if he’s convinced that he’s going to sell the same share for higher price going forward.
Similarly, a seller would sell a stock at a price which he’s feels is best for that stock currently and might not go very high going forward.
Buyer’s and seller’s views are always contracting, one should analyze a company in detail, going through their financials, performance and management decisions and plans. Which would help in weighing the current and future price of the stock and then should decide on to buy / sell a stock.
Warren Buffett says, “Stock market is a device for transferring money from the impatient to the patient”. This pretty much sums up how people make money in stock markets when it comes to long term investing.
It’s very important to not be a victim of panic buying of stocks in FOMO (Fear of Missing Out) often starts with an illogical hype which doesn’t justify its performance as a company, it’s always best to avoid such traps.
Similarly, FOBO (Fear of Better Options) grips in investors while buying a stock but they are not confident on that company’s future performance.
This generally happens when thorough analysis is not done before deciding to invest in that company. So, make sure to have done enough research before putting in your hard-earned money.
Is it a Risky bet or a smart play?
Stock market is never too dangerous nor a child’s play, this involves some serious dedication and efforts combined with a pinch of luck to make fortunes.
There are 2 types of traders/ Investors in stock market:
- Calculative and assertive minded
- Constant fear or greed grappled.
First kind are the ones who assess markets with logical minds by analyzing companies based on their performance and management’s decisions and planned events.
They weigh in the key factors like profitability, Price to earnings (P/E) Ratio, Price to book ratio (P/B), company’s assets, debts, liabilities etc. Fundamental and technical analysis are their key weapons helping them set realistic expectation in terms of market’s performance and will filter out the companies and invest in them. They tend to be successful 9/10 times and would be able to make fortunes in long run.
On the contrary, the second kind view markets as some magic wand or a short-term money-making machine or a lottery which would change their fates overnight.
With a greedy mindset, most of them would buy some poor performing penny stocks in hope of that stock turning into a multi bagger overnight.
When that stock goes down a bit, they tend to burn more cash in averaging the price and further average down when it falls and will repeat the same until they realize that they are trapped in a junk stock.
Such people can only see their capital melting down to 0 and can’t do much about it than regretting buying a stock without any analysis but because of only hype and buzz.
It’s always better to build wealth slowly but surely than losing everything.
Conclusion
Stock market is never a walk in the park nor an enigma code if your goal is to make some money by investing or trading. Although it makes millions of millionaires every year forcing some to go bankrupt at the same time. Weighing the risk to reward ratio, one should be able to successfully decide to start investing into stock markets or not.
For a conservative minded, mutual funds would be a better choice over stock market.
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