Stock Market - A platform/market to exchange stocks/shares of publicly listed companies. But it’s much more than that, at least for me. Let’s discuss the stock market in this post.
For me, the stock market is like a teacher, who teaches me a lot of things. It rewards me for good predictions and punishes me for bad predictions which I made under panic/hurry.
Stock market plays a pivotal role in the economy. Actually, the stock market was created for companies to raise money from the retail public like you and me. And we invest money in the stock market with the hope that it’ll grow over time. But to grow money, we have to make correct predictions. And that’s where the whole game starts.
There’s a big world of algorithmic trading. Read this interesting article on “‘It’s a Matter of When.’ How Machines Are Taking Over the World’s Stock Markets”. And machines are faster too, they can make predictions in a couple of microseconds. We humans take far more than that.
Most interesting thing in the stock market for me, is the Dopamine hit.
Dopamine hit & FOMO
When stocks you have bought rises, you get happy, when they come down, you get a bit sad/frustrated. Long term investors do not care much about daily volatility though. When I first invested my own money in the stock market, I used to check prices very frequently, like every 15-30 minutes.
Sometimes, stocks which are going higher and higher, which you missed, gives you FOMO - fear of missing out. I am largely driven by FOMO in daily life and in the stock market too. For me, dealing with the regret of missing some great opportunities is hard. So sometimes, people like me get beaten up in the stock market. I think, regret of missing the opportunity is difficult to bear than taking the opportunity and then failing at it.
Lessons which stock market teaches are invaluable. You need to have a heart to digest huge losses and acknowledge your mistakes while keeping your ego aside.— Prashant Kikani (@prashant_kikani) January 11, 2022
Ironically, I tweeted above statement after bearing a huge loss in the Paytm stock (to express my feelings)! But I think, dealing with all these, prepares you for the real world. Which is super messy. Stock market trains you to control your emotions & make wise decisions to get rewards, otherwise you will get punished badly. Stock market also teaches you patience - you need to give yourself some time to make right predictions.
Low principal amount
One of the biggest curse(and boon at the same time) for people starting out in the stock market is their low amount of investment. In India, people usually start with 10k-50k of total investment. So, even if stocks they invested in, get doubled(i.e. 100% return), they will get a small amount of money, as their principal itself was lower.
To earn an absolute 10k of profit in the stock market, you need to get 100% return - if your principal investment is 10k. But you just need to get only 10% return if your investment is of 100k. Getting 10% return is far easier than getting 100% returns. But obviously this acts both ways - for 10k principal amount you need to lose 100% of the amount to lose 10k, but you just need to lose 10% of the amount in case of 100k amount.
But in the long term, markets always go up. Some individual stocks may lose value but, whole market always goes up. At least that’s the case in the last couple of decades. So, a high principal amount always helps in the long term.
[By “absolute” I mean, the absolute operation from mathematics. Absolute operation changes negative number into a positive number, and keeps the positive number as it is. For example, absolute value of -50 will be 50 and absolute value of 50 will remain 50.]
After some big losses and wins in the stock market, I have realised this - if your absolute loss/win amount is big, then you’re growing. “Growing” here means you are getting wealthier. When so much money is at stake, your wins and losses will also be bigger. And to have so much money on the stake, you first need to have that much money. It sounds naive, but it’s a fact.
When people are playing big games, wins and losses will also be big(in terms of amount of money). And I think, big losses have at least one positive aspect which is - at least you were playing a big game in the first place. When stacks are high, reward/loss will also be high.
For example, when the stock market goes 5% up or down, their founder loses their net worth in billions. When Tesla stock goes 5% down, Elon Musk loses his net-worth in billions. It’s paper money - he’s not losing those billions from his bank account, but still.
When you have invested crores(or millions) of money in the stock market, even 1% loss will seem a big amount of money. But again, to invest in crores(or millions), you have to have those crores or millions. So, you’re wealthy & rich already.
Derivative market - Futures and Options (F&O)
Market in which we can buy/sell shares of different companies is called cash market - a marketplace in which the commodities or securities purchased are paid for and received at the point of sale.
There’s another market called “Derivative market”. It’s kind of derived from the normal stock market(in which we buy/sell trade). In the derivative market, people make bets on the price of market indices like NIFTY and certain stocks.
If you think price of a stock will go up, then you can buy “call” options. If you think price will go down, you can buy “put” options. If you think price will not go up,(i.e. will remain almost flat or will go down) then you can sell “call” options. And if you think market will not go down(i.e. will remain almost flat or will go up) then you can sell “put” options.
By buying/selling call/put options, you’re making a bet. If your bet turn out to be correct, you will make money, else you will lose money.
Derivative market as a whole, is a zero-sum game. For one party to win, someone else has to lose.
Size of the global derivative market is more than $600 trillion!! For comparison, as of 2022 GDP(Gross Domestic Product) of the whole world is around $80 trillion. Some market analysts estimate the derivatives market at more than 10 times the size of the total world’s GDP. How is that even possible? Mostly because there are many derivatives in existence, available on almost every type of investment asset, including equities, commodities, bonds, and currency etc. In short, derivative market is not small.
Inherently, traders can take very high leverage positions in future and options(F&O). As you might have guessed, because of very high leveraged positions, volatility in futures and options market is way higher than the normal stock/cash market. And trading in future & options require emotional control and discipline along with analytical skills.