Investing in the stock market - Science or Art!

Sir Isaac Newton one of the well known perceptive scientist in human history once invested his money in South Sea company and faced a loss of around 20,000 euros ( more than 2 million in today’s money). He hated the word South Sea for rest of his life, these are the consequences of the loss in share market.

Long-Term Capital Management L.P, a hedge fund which was run by few Nobelist and mathematicians placed its money on hedge funds and lost 2 million dollars in a week and declared themselves bankrupt.

All these stories above gives us the lesson that stock market is very volatile and can not be understood by science, it’s an art which can be developed through analysis help, assumptions, predictions, patience and character.

The most inappropriate perception of people who trade in share market is people should buy the shares when the market is showing bullish pattern, as the prices of stocks are rising and should sell when the pattern is bearish, however it acts to be false mostly because people should buy when a large number of shares are available in the market which is possible only in a bearish market not in bullish.

Investor or Speculator- Who you are?

Investment is the activity of funding money in order to expect the returns, and these returns are completely on the basis of the analysis, assumptions with the full principal amount in a stipulated time horizon. If we fail to fulfil the above requirements like lack of complete analysis will lead to speculations.

Importance of speculation lies for the companies who enter the exchange market in order to raise funds for their further operations like Bandhan Bank recently offered its IPO. People will have to subscribe them on the assumption that they will give them the returns and dividends through their operations and profits but it may back-fire with huge losses. Companies like Amazon would never have existed if people believed only on investment, not on speculations. The stock market is a probabilistic market which will be beneficial for few and detrimental to others.

In case of consecutive depletion taking advice on the stock market helps the traders to minimise their losses by avoiding the reckless investing. People should know what they are buying or selling at what price. Traders dividing their holdings into debentures and common stocks, such that the proportion of holdings is 35% and 65% respectively when the market is showing an attractive increasing index, where returns from a common stock are higher plus we have fixed returns on debentures. If we find that market is at dangerously higher risk shifting the holding to 65% and 35%.