5 Approaches to Stock Market
Here are 5 approaches that you can use to trade and invest in the stock market. This is created from personal experience and is to serve you as a broad framework for investment.
There are several ways / strategies in which you can approach money making in the Stock Market. You could potentially optimize on parameters Returns and Risk, extent of personal engagement versus taking a more hands off approach, betting on Trading versus Investment and so on.
In this blog, let us take a view of what alternatives are available to us and what benefits and disadvantages they have in store for you.
The intent of the post is to just share our experience. Each of these is specialized and needs you to do in depth study before putting in capital. Remember, it is important to do due diligence before going down any path in the Stock Market.
Approach I: Trading
To a beginner, stock markets inspire the imagery of multiple dark monitors with rapidly ticking prices and a bunch of busy traders thoroughly immersed.
Simply put, you could think of trades as one of these two:
(a) Cash Market (equity) trades (Intra day to a few days).
(b) FnO (Futures and Options) trades.
To be successful, these trade require you to be good at Technical Analysis. Beginners and amateurs often rely on tips to get hints on good bets they may take on the short term. However, it does not sustain beyond beginners luck!
Intraday trades take place within a day, which means you buy and sell within the same day. Such trades have lower brokerages. For example: you can find Zerodha charges here: https://zerodha.com/charges/#tab-equities
In Intraday trades you may hold a position for few minutes to one day at maximum. If you do not successfully sell a stock you bought, then the market will enforce a square off (sell on your behalf) when the market closes.
Short term trades on the other hand can go beyond a day, say to a few days.
What do you need to have to be successful at this?
The core technical skill is ‘Technical Analysis’. Technical Analysis is a large subject. And most often than not, when beginners try to get into the world of TA, they get lost by the sheet breadth of the subject.
Our realization on the topic is it is better to focus on a small subset of technical indicators and learn their application, and build expertise around them. Focusing on building a large and in depth skill set in TA can be frustrating and counter productive if you are not able to put it into use.
FnO trading deserves a special mention. FnOs are very attractive for the potential of return they have. However, they are also very risky. This is simply because of the nature of the asset, that we will discuss in a separate blog.
Approach II: Equity Investment
This is what you will learn if you study the likes of Warren Buffet and Charlie Munger, or Rakesh Jhunjhunwala: INVESTMENT.
When you put on your investor’s hat, you are no longer thinking of ticking stock prices, ringing telephones and loud heartbeats. This is a field of patience, study, and careful practice.
Your approach here is not to make money in minutes or days. You make money in years by becoming a stakeholder in a business. You do not think of stocks as a ticking number. You think of a stockholder as a part a business that makes money, has people operating the business, and customers of the business. It is not a stock you own. It is a part of business that you own!
You grow when the business grows, you profit when the business pays out its shareholders and if you are a part of a great business, its growth story is your growth story.
Be it Berkshire’s investment in Coca Cola or Jhunjhunwala’s investment in Titan. These can be immensely rewarding and help create long term wealth for you!
This of course does not have the thrill and adrenaline rush of trading. But if you believe in getting things right with due diligence and over a longer period of time, this is for you.
Practitioners of 'Investment' often believe this is the only and correct way to create wealth in the stock market.
Approach III: Mutual Funds
Somehow, young professionals do not realise until much later in their careers that MFs often give a simple and hands off way to create wealth. Mutual funds have given remarkable returns, including 3-10 times returns over a decade.
I will do a series on them over different posts for you to get a sense of the returns.
In good markets, of course these can yield awesome returns. Of course, this is when the market had bullish runs and perhaps an average investor can make money. However, indeed professional fund managers managing a part of your money can be reassuring. It can also be an hedge if you miss out any long term opportunity.
Approach IV: Private Investment Firm Baskets (Smallcase)
Small, successful research funds package their investments into baskets that can be followed over Smallcase. The yields of these packages have been substantial over the last year or two and could present good opportunities. Some of these packages charge a fees that you need to pay via the platform.
You could choose to diversify your money into one or more of these categories depending on your return expectations of these both in terms of return quantum and return time frame.
Approach V: IPO Gains
If you are careful and meticulous enough, IPOs in recent years have proven to be a fantastic quick way of making returns. This is of course provided you have a way of assessing IPOs.
We did a post on IPOs: 6 IPO Questions for the Stock Market newbie. Some of the IPOs have given great gains on opening. However, the exceptionally large demands more often than not reduce the probability of an individual retail investor in getting a successful allocation.
Summary: Our Approach
At present, our investments combine all five of the above.
- We engage in both Intra Day Equity and FnO trades. Intra Day is a combination of stock selection that we understand and from broker tips, and FnO being primarily with Nifty and Bank Nifty. Since Option Trading incurs a great amount of risk, I currently limit my exposure a great deal to minimize risk as much as possible.
- Long Term Investment: 35% of my capital corpus is engaged in long term investments that are presently at about 25% upside.
- Mutual Funds investment: Another 35% is in Sectoral Mutual funds (primarily Energy, Healthcare, small caps and Consumption funds).
- A nominal percentage in Smallcase, where we are still tracking the success of this category of investment.
- IPO bidding on opportunity basis.
