in stocks directly is the rage these days. Working from home with more time on hand has translated to dabbling in buying and selling shares at a fast pace. Moreover, many individuals are using the equity market as a means to generate a supplementary income.
But do you have what it takes?
Time is of the essence
in equity markets directly, with the objective of making quick gains is an exciting proposition when you compare it with choosing to buy and hold a managed like a .
However, what looks exciting in a rising market, can turn sour just as easily in a falling market. Unless you are prepared to spend time analysing price charts and company fundamentals, reinforcing your price target on a daily basis, it is hard to sustain making quick money in equities.
Investing in equity means buying a share of an existing company, a going concern. The share price is a reflection of the earnings growth potential of that company.
Investors not only need to understand the fundamental financial situation of a company before buying the shares but also have to keep track of developments that can impact daily price changes. This requires spending time away from your day job andin increasing your knowledge about how to analyse financial statements and also price trends.
Secondly, if you arein the hope of making a quick buck, then timing the market well is also important. As we saw in March this year, stock market prices can move down much faster than they go up. After the market crash in March, investors lost 40%-50% of gains made over the years, in a matter of a few days. While some stocks have recovered, many are still down at the bottom. If you get your timing wrong and enter at the peak of the market, then a single day sharp crash can make you lose out heavily.
Investors not only need to understand the fundamental financial situation of a company before buying the shares but also have to keep track of developments that can impact daily price changes. This requires spending time away from your day job and investing in increasing your knowledge about how to analyse financial statements and also price trends.
Equityis also a matter of patience. This is hard to understand unless you have undergone a few up and down price cycles in the equity market. This means that while the experience of a rally will be good, don’t mistake that for the only experience.
You will at some point have to sit through a correction too. Doing that requires a lot of patience and commitment. Ultimately, it’s in a correction that you will either solidify your conviction in the equity market and understand long term wealth creation or give it up as lost opportunity and move on.
The last big correction started in 2008 and lasted for almost one and a half years. Sitting through that, without any certain prospect of quick gains is more about quality and conviction than excitement.
While it is more glamorous to pick a stock, buy it low and sell it higher within a few days, this kind of trading is rarely unidirectional. Which means, along with your gains there will be losses too. The time commitment and knowledge needed for you to have more gains than losses will end up taking away time from your regular profession and eventually it’s not sustainable.
An easier, albeit seemingly boring way, is to allocate money to managed funds where the appointedis a professional who does the job of acquiring this knowledge and picking stocks to build a . Equity sounds exciting, but the way to making sustainable long term returns and wealth creation is often slow and steady.