People don't invest in stock because of fear and greed. But these are not the main reason for incurring losses in the stock exchange.
Introduction: PSX Unique Characteristics
Yes, there are stocks that even perform during pandemics like Spanish flu, COVID-19, etc. This shows how lucrative it can be to invest in the stock exchange.
A point on the stock exchange is worth Millions. We heard it all the time in the news that points have dropped. This information about the Stock Exchange shouldn't be a surprise. This means the worth of the index has gone down or investment has retreated.
Generally, the stock market is for a very very small number of persons mostly rich people with long-term horizons, who can afford to lose money.
It is a suggestion to learn it before investing in it. In PSX or Pakistan Stock Exchange Market there are some characteristics that are not imitated by the stock markets of developed nations. The first characteristic is the carryover transaction.
1. Carry Over Transaction:
COT or the carry-over transaction and in Urdu, it's called Badla (بدلا).
Whenever someone makes an investment with the brokerage firm or when s/he opens his own account through a brokerage firm.
The brokerage firm is obliged to repay him/her the shares of double the amount of investment.
Now let's take an example of understanding what it is.
Suppose the investor has to open his account with the brokerage firm. He has one lakh rupees for this purpose.
When he pays one lakh rupees i.e 100,000/- PRs to a brokerage firm for shares.
He can have shares of an amount worth 200,000/- Pakistani Rupees in accordance with COT.
Now Imagine that the price of shares begins to fall and it falls to 100,000/- rupees. Now due to the loss of One Lack Rupee, total investment balance becomes 100,000/- Pakistani Rupees.
You have to understand that the brokerage firm will withdraw this one lakh rupees. Thus the investor will have no money left with the brokerage firm.
This is the first reason why many people lose all of there savings in the stock exchange.
If you are not an expert then COT is highly risky and prohibited for you.
2. Day Trading:
It is speculation in shares, specifically buying and selling financial instruments including stocks within the exact trading day.
Day Trade Stocks Today?
If you are keen on day trading in the stock exchange, then I'll request to revert your decision.
If you don't have the know-how of stocks, the required experience, and expertise then it is highly disallowed for you.
Because without these it is very difficult to realize profits from day trading.
It is very difficult or very rare for the majority to earn profit from the market on day trading but longterm investment in the stocks almost always yields profits. Instead of day trading, your focus should be on long-standing.
As said before if you have no idea of companies in your potential portfolio and their businesses, accounting terminologies, economy, and other important know-how.
Then stock exchange and specifically day trading can be very dangerous for you.
If you don't have the knowledge about the balance sheet, income statement, cash flow statement, other financials, and concerning financial information and you can't read it, and you decide to invest in day trading on the basis of the word of people.
Then it is almost impossible that you will realize a profit from day trading in the stock exchange.
So, it is very important that you have basic knowledge about securities portfolio management or it's a good idea to seek professional advice from brokerage firms for longterm investment.
If you rely on the advice of professionals, still day trading is not advisable for beginners.
Anxiety and greed in this business and the above two reasons amalgamated into this situation will result in a definite loss.
Various Strategies used for Day Trading:
1. Scalping: Day traders make numerous small profits on small changes in prices throughout the day.
2. Range Trading: This uses support and resistance levels to determine their buy and sell decisions.
3. News-based trading: This typically seizes trading opportunities from the heightened volatility around news events.
4. Frequency trading: It involves the use of sophisticated algorithms. (An Introduction to Day Trading, 2020)
It refers to the sudden, wide-scale selling of shares by a large number of investors, resulting in a sharp decline in price. (GANTI, 2019)
In some situations what we call panic selling is not panic, we can call it a strategy to survive in difficult times.
It is totally understandable to realize a minor loss on shares and to retreat your investment in times of pandemics like COVID-19 or in other hard economic conditions.
Because it is certain that the market will fall. If you are incurring a loss to avoid a bigger disaster then it's not a bad deal at all.
There is no loss if you don't realize the loss, e.g. If you bought a share for 50 dollars and due to some reasons it's price falls to 48 dollars. But you decide to retain the shares and you're not realizing the loss.
Instead, you purchase some more shares at a price level of 48 dollars.
Due to the further decline in the share price you again purchase the shares at a price level of 40 dollars.
If you analyze the average price of the share falls to 46 dollars. If you will sale the shares when the price level of the shares is high. Then instead of loss, you can realize the profit.
Conclusion: Why you should invest in the Stock Exchange
It is an utter fable that you will incur a loss on PSX Portal or any other stock exchange only because of greed or panic. If you are not greedy and you have good nerves, then still there are many other variables that need to be controlled to succeed in the stock exchange. There are many other reasons behind this.
If you have the know-how, honest expert advice and you are able to hold the shares for the long-term. By avoiding COT and day-trading, you can earn profits in the stock exchange.
For this, you need to have a demo account and practice trading on the stock exchange. Increase your knowledge and widen your social networking with brokers.
With these simple tools, you can make easy profits in any stock market.
1. GANTI, B. (2019). Panic Selling Definition. Retrieved 28 July 2020, from https://www.investopedia.com
2. Investopedia. 2020. An Introduction To Day Trading. [online] Available at:https://www.investopedia.com/articles [Accessed 31 July 2020].
Warren Buffett on Stock Market
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
© 2020 Mohsin
Mohsin (author) from Pakistan on September 30, 2020:
Thank you Indra I hope it will help you.
Indra from India on September 29, 2020: