Small-Medium Investors Fate, when caught in Stormy Waters

Does Margin Trading, over leveraging, short selling ever ring a bell? well these are the norms by which capital markets breathe everyday. For everyone’s understanding, these are the terms being used to allow investors & traders to do more with their given resources, in other words, if I have $5000 in equity, my broker could easily let me trade for a value 5-10 times higher, which in this case could be $25k to $50k. It sure sounds too good, as it gives an opportunity to make a lot of money, so one cannot take away the temptation. There is another way to look at this scenario, you start trading something you don’t actually own, infact, you just own 10-15% share in the entire deal

As much as we give credit to smart stock market, currencies, bonds, traders, brokers for their timely actions to enable their clients make good money, there are serious risks and threats for small private investors having limited resources, and either inability or lack of knowledge on capital markets way of working. There are mandatory regulations requiring finance houses to print warnings at the time of making investment offers, but in all honesty, no one goes out to explain the extent of damage one could get if things don’t work out as anticipated. Someone entering the market, taking an exposure against 10% equity, means if the market goes down 10%, the entire equity is wiped out in case someone has bought. On the other hand, if someone does short selling, meaning you anticipate a fall, so you blank sell, and wait for market to drop so you could buy at low levels, and gain on the difference. What if, market doesn’t go down? you stand to lose your equity as it would be used to settle the deal

Brokers are tough to be understood, I am not being disrespectful, but the fact remains, they are merely keen on making brokerage, so they encourage investors to trade as much as possible. It would be great if they also start feeling responsible when accepting funds from pensioners, widows, small investors etc., by way of showing them complete picture

Speculative trade works best for institutional & high net-worth investors, who have deep pockets to take delivery in case they have bought something and they couldn’t sell at a higher price before the settlement day, or if they have sold short, and market doesn’t come down, they would give delivery as they would have definitely held those stocks in their portfolio

Another risk for private investors in respect of lack of knowledge in terms of knowing how much a particular stock is liquid, it means what is the outstanding number of units available in the market for open trading. Institutional & high net-worth customers have full knowledge, so they would never trade in something which is not liquid, as they would have serious issues to buy or sell within the settlement time

Being a fund manager, its all about being patient, planning, wait for the right time to enter and exit, balanced portfolio is key to long term income & growth, while a small portion maybe set-aside for daily trades as long as there is liquidity and for private investors, please watch your back, study the commodity you want to trade in, check its historic trends, current outlook and future expectations, keeping in mind, market forces, demand-supply situations, free float knowledge etc

It always pay to be prudent, cautious, and its most satisfying to know you have earned the rewards and not won through gambling

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s