The Big Giant

The stock market is a dangerous big animal that is capable of marvelous feats. It can be a generous queen who can make you a fortune as well as a high maintenance girlfriend which can cost you a fortune. The one important thing we must learn before venturing into the stock market is that believe in yourself.

We all know that the stock market can go either up or down depending on factors we cannot control. You must be wondering, if the stock market is this volatile then how can you make money?

Now contrary to ‘popular belief’, a lot of people are of the opinion that the stock market is rigged and controlled by a few big, rich and powerful men. If your one of the few who doesn’t believe so, then you’re one of the smart ones. The primary reason why the stock market cannot be rigged is because the stock market is too big a beast to be controlled. Basically on an average millions of shares are traded on the stock exchange and controlling such a volume of shares is impossible. Now there can be a few exceptions but that can only happen in small cap companies (Small cap companies refer to small companies with a lesser number of shares traded on an intraday basis).

Now the most commonly used way to make money in the stock market that I personally use is not intraday trading but medium term trading. Now the stock market as a long term investment might not be a good idea as it keeps going up and down so the net return you would receive is not very high. For example, The Dow from 2000 to 2010 moved up effectively by around 200 points while the Sensex in the last 3 years has visited the 16000 range thrice.

From these examples it is quite clear that long term investing is risky(As opposed to the popular belief that long term investing is safe). At this point I would like to quote something about the stock market which my father still tells me, “The market has the capability to remain irrational for a far longer time than you being able to stay solvent”.  Thus the one thing that we must never do is get carried away.

When investing in any stock have your exits clearly marked. As in you need to set a stop loss (this means that if the share price falls below this value then you sell the stock and bear the loss) and at the same time you need to set a price at which you will book your profits and sell the shares. Both of the above mentioned values depend on personal risk appetite.

Now it is up to you to set those values and it is important that you stick to these values, so make it a point you decide your risk appetite today.

Cheers,

Shail.