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Perils of online stock trading for retail investors

Advisers warn it almost always ends in losses

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With Indian stock markets experiencing long rallies amid high volatility; there has been a proliferation of online stock traders, day traders, stock trading apps, internet-based trading platforms and a new breed of advisers.

India’s stock market indices – S&P BSE Sensex and Nifty50 – have frequently scaled new peaks this year, continuing a bullish trend from last year, attracting thousands of novice investors. Indian stocks have risen more than any other major market in the world this year and that is luring millions of local investors to put their savings into equities.

Sensex rose 28% and the Nifty 50 index jumped 31% this year.

Hundreds of start-ups promoted by so-called ‘experts’ have launched platforms to educate new investors who have no experience in stock trading, but want to make quick buck. These trading apps have revolutionised broad based trading, raising the volume and market capitalisation to astronomical levels. The daily trading volume also rose and at one time the market capitalisation reached $3trn (£2.2trn, €2.6trn), more than the GDP of the country.

BSE Sensex crossed the 60,000 points mark on 24 September 2021, for the first time, surging 134% in 18 months. The percentage of individual investors increased from 33% to 45% over the past five years.

Traders, not investors

“The market is seeing a new phenomenon that there are more traders, and not investors, who enter the market and burn their fingers, losing their hard earned money,” said Binoo Nayyar, chief financial officer at TrendRiser Securities, Dubai.

“They are traders, not investors. It’s gambling if you enter the market without knowing the dynamics of online trading, fundamentals and technicals.”

Many NRIs are also joining this bandwagon, bypassing the brokers and advisers, hoping to become rich overnight and save on the commission.

Said VS Bhuvanendran, director at Hedge Equities, India: “This is a dangerous trend we see in the market that as high as 98.5% of new individual traders have incurred losses. Almost all online traders have wiped out their capital.

“This trend needs to be discouraged as we come across many individuals who left their full time jobs to turn traders, hoping to make more money through online stock trading,” he said.

They are enticed by reports and rumours that many of their peers experienced windfalls and unimaginable gains in a short time span.

This is compounded by Youtube advisers, who offer a rosy picture, but in reality it’s your hard-earned money.

“Online trading is becoming an addiction for new investors, who will never know when they are going to lose their money,” he said.

Know your fundamentals

However, Manoj Kumar Vallikudiyil, managing partner at Manjul Associates, securities and investment consultants, Dubai, says that that the Indian market offers individual traders excellent opportunity to make big money, but only if they enter it after thoroughly studying the dynamics of online stock trading.

Bhuvandendran said: “It is true that traders have struck gold, but only a few could book profit at the right time and exited the market.

“They should have the patience to book profit and the courage to book losses. Take to online trading if only you read and strictly follow technical charts.”

But if traders are determined, a maximum of 20% of income should be used for trading. And never put your savings in stocks through online trading.

Bank on SIPs, mutuals

So, how can one gain from this stock rally?

“Of course, every investor can gain from the market. One can gain from the market rally through systematic investment plans (SIPs) and mutual funds. It is always ideal to have a long-term view,” Nayyar said.

Bhuvanendran also bets on mutual funds. “Have faith in mutuals as they are managed by professionals. Investors should do their homework to study the growth history and returns for the past 10-15 years. If a retail investor wants to have stock market exposure, the best options are mutual funds and SIPs.”

Kumar said: “Invest only when there is correction after seeing technical support. The strategy should be accumulate on correction.”

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