‘Forest’ friends in Dalal Street Premium

Unraveling the complexities of the stock market

With its tricky jargons and complexities, the stock market is a maze-like labyrinth that often perplexes new investors. In the previous episode, we unravelled the jungle and highlighted a few animals and their behaviour. Now, we are untangling others from the world of bourse...

Known for impulsive behaviour, scalpers and intraday traders are the picture-perfect examples of nimble rabbits. Quite averse to overnight risk and aiming at instant profit, rabbits (traders, not investors) avoid holding a position even for a day. Often considered the darlings of the brokerage firms for their multiple entries and exits on a single day, they pay huge brokerage to the Depository Participants (DP). Dividend, Return on Equity, PE Ratio, Return on Capital Employed, Free Cash Flow, and so on and so forth are all not really up their alley.

For instance, Hari purchases 5,000 shares of ABYZ at 9.32 a.m. for ₹125 and at 9.34 a.m., the price hits ₹125.20. Within two minutes, Hari would book a profit of ₹1,000 [5,000*0.20]. In the same vein, he would make more entries and exits before the market closes on the day, booking up small profits at each trade. This way, he makes a considerable amount of profit on a single trading day and also would pay a hefty brokerage fee to the DP.

For Turtles, market crashes are like water off a duck’s back, they just shrug it off and move on. Jumping with joy, they consider the bearish market an opportunity to accumulate more shares. They remain unfazed by any bad news, short-term fluctuation or volatility in the market. The more the stock nosedives, the more they buy and keep on averaging it.

Let’s assume Hari had purchased one share of ABYZ for ₹125, after which the market crashed bringing the stock to ₹25. Instead of indulging in panic selling, prudent Hari will buy five stocks for ₹125. When the price was record high at ₹125, Hari purchased only one share, but after the crash, he bought five. If the market remains bullish, Hari could buy only two shares for ₹250. But, owing to the fall, Hari’s portfolio now has six shares costing ₹250, thanks to the market crash and averaging.

When faced with danger, an ostrich buries its head into sand. Likewise, these investors turn a Nelson’s eye to any bad news in the market, in the hope that the news would disappear on its own. They just blindly believe that “all is well, when really all is not well.”

Let’s assume that an Ostrich investor heard it through the grapevine that ABYZ will pull down the curtain soon, and that’s the reason its shares fell like ninepins from ₹125 to ₹25. Despite getting this inside scoop, this investor doesn’t sell the shares and realise at least ₹25 per share. Instead, he believes, often without a valid reason, that the news is not true and that the stock will recover soon. Alas! The news would be true and the entire money is lost forever.