Trading in securities essentially needs expertise. Shares, for instance, come with a high component of risk. Even the world’s top companies are vulnerable to tectonic shifts in fortunes, either due to changes in economic winds, failure to keep moving with the times or plain mismanagement. Remember only General Electric remain in the blue-chip Dow Jones Industrial Average index from the original twelve.
In an era of falling interest rates more public savings are being funneled into financial assets such as stocks and bonds, a trend that is bound to pick up steam because of better returns the securities offer. Historically, equities are the best bet for investors over the long term, with a portfolio consisting of a mix of shares and bonds providing shelter against wide price swings and ensuring steadier returns.
Before moving hard-earned cash to shares, an investor must study the company’s balance sheet, financial ratios, products the company make, market conditions, strategies, plans as well as a thorough background check on the management. A misstep could prove catastrophic and may wipe out your money.
Traditionally, a full-service broker, backed by an army of financial experts who pore through company records and understand industry trends, has been the first port of call for an investor. The securities house would analyse a company threadbare and come up with an informed recommendation. Wealth managers at the brokerage would also study the financial standing of an investor, his family profile and decide on the risk he could undertake.
Hand-holding investors through the minefield of high-risk equity investments, full-service brokers provide a welcome reassurance with their personalized face-to-face interaction. They also provide valuable research on companies, including deep insight on the pros and cons, on a regular basis and advise a client either to buy or sell a stock.
All this homework comes with a price tag, but the money is well spent. Until a little over quarter century ago, share transactions in India were the exclusive monopoly of registered brokers and their staff through an “open outcry” system, where they jostled for space on a frenzied trading floor, elbowing and shoving others in a melee, and often grabbing collars or ears to scream or whisper quotes.
The advent of online trades and easy internet access revolutionized the way stock exchanges functioned. Exclusive rights went out of the window and in its place emerged computer terminals that offered a level playing field to investors to directly strike deals. Investors can today directly trade from their homes based on the advice of full-service brokers.
By 2010, came discount brokers who offer a facility for investors to trade at rock bottom fees – as much as 80 per cent below what a full-service brokerage charged. Unless you are very knowledgeable of financial matters, company profiles and industry trends, going with a discount broker is fraught with trouble. It could erase your savings in no time.
Information and understanding the pulse of markets are key to making a fortune in stocks. Buying alone doesn’t guarantee successful strategy; you must be aware of happenings within the country’s economy as well as around the world, and political developments or upheavals that could impact your investment. In simple words, you must know when to get in, and when to get out. Joseph Kennedy, the father of assassinated US president John F Kennedy, famously once said he knew it was time to sell out when the shoe-shine boy on Wall Street gave him tips to buy stocks!
One of the prime movers behind stocks is rumours and unsolicited advice, especially by word of mouth, publications and inside information. As stocks or bonds investing need a good understanding, it goes without saying that the roadside “pan wala” is not the right person to rely on for stock tips. A full-service brokerage is always a reliable intermediary to knock down rumours as well as help an investor steer clear of pitfalls.
Kennedy beat the 1929 market crash “because he possessed a passion for facts, a complete lack of sentiment and a marvelous sense of timing”. Blessed with deep insight of markets, he pumped cash mostly into real estate during the Great Depression and boosted his wealth to $180 million by 1935 from an estimated $4 million in 1929.
Such instances, however, are rare. Most investors are poorly equipped to make the right call. A good number of people follows the herd mentality, prevalent across markets worldwide. Because his neighbour made a killing in a stock, Tom John makes a punt without any checks about the company or what it does. The sole driving factor is greed, and at some stage these trades end in grief.
Remember, sound investment advice is worth its price in gold. For paying little extra a full-service broker would be able to guide you through turbulent times, avoiding mistakes of selling at market bottoms or buying during speculative bubbles.
Bad calls are a disaster. In fact, the combination of low-brokerage fee and lightning speeds of online trades is a fatal potion for new investors. The beginner’s luck often favours the novice in the early stages, when he strikes out with small-sized trades. The profits lure him into bigger stakes. Before long he shifts gear to chase the pot of gold at the end of the rainbow. From a small-time investor he graduates to a high roller, a day trader riding on hunches, wits and wildcat speculation.
Obsessed with short-term price gyrations, people also become addictive and the cheap costs of trades and deceptively easy one-touch online facility encourages even conservative investors to trade more frequently, making them vulnerable to higher risks – and collapses. Holding a level head is a herculean task for the uninitiated with little knowledge of markets, company profiles, industry trends, government policy changes, direction of economic winds and so on.
One major downside of discount brokers is the lack of red flags or warning signs. There is no one to tell you this is not the right time to buy or sell, that decision solely is your call – unlike a full-service broker who would give you a heads up regarding an upcoming event that would have an impact.
For instance, a company may be about to make a major announcement about a deal that could positively impact its share price, when an unaware investor decides to sell the stock. Unlike a full-service broker who would tell the client about the impending news, the online facility of a discount broker provides no alerts.
So, while low brokerage fee has its plus points for a knowledgeable investor, it is not advisable for plebeians. A full-service brokerage will allow you to sleep easy.
Posted: October 2017