What stock brokers don't tell you

DO you find yourself quoting proverbs or famous last words when teaching a child something important? You would rather fall back on their instinctive sense and the shared universal meaning.

It is much the same for stock markets. To learn the fundamentals of the market, the easiest approach would be to use often used maxims from our everyday life.

So here are 11 of them. The knowledge behind each is gained from several excellent books on the vast, fascinating subject of stock market investment such as Peter Lynch's One Up On Wall Street and Beating The Street; Zulu Principle by Jim Slater; and Robert Hagstrom Jr's The Warren Buffet Way.

The application, however, is entirely mine.

1. No pain without gain
This is the base level fundamental of equity investing. There is a close direct relationship between risk and reward. The higher the reward, the greater the risk. Fairly simple to understand, but it is most difficult to live by.

Where there is profit, there is always risk. The greater the opportunity of profit, greater the possibility of loss.
. Slow and steady doesn't always win the race
Gentlemen who prefer bonds don't know what they are missing! On bonds, there is no return on money; there is only return of money.

Bonds being debt instruments, unlike equity, yield only fixed return. And, with inflation and income tax factored in, there is often no return at all.

(INFLATION METER: Did you know that your expense of Rs 10,000 today will be equal to Rs 46,609 in 2028? That's because inflation is at 8% today! Use our 'cost of living ' tool to find out how inflation will affect your budgets!)

3. United we stand
Investing in equity shares of companies is risk related because returns are linked to the company's profits unlike investing in bank deposits or bonds or debentures where the returns are fixed and accrue to investors regardless of the company's profits.

In the stock market, you are tying yourself to the company's fortune.

4. It takes all kinds to make the world
Stock market behaviour is not unpredictable as it is commonly believed. It simply depends on human behaviour which, as we know, can never be predicted with any reasonable accuracy.

Hence, we have fluctuations in prices of commodities, things and stocks based on greed, emotions, hopes, fantasies, fear and dreams of millions of people, resulting in opportunities of making money out of such fluctuations!

Find out how one investor lost Rs 35 lakh in the stock markets !

5. Common sense isn't all that common
Not all common stocks are common. Though equity shares as an investment class is one, each company has a distinct identity and performs differently and, therefore, rewards its investors differently.

6. Ignorance is bliss
Investing is nothing but an arbitrage of ignorance. Investing is basically profiting from pricing and difference in market perception of a given product at a given point of time.

Stock market is one place where the buyer and the seller both think that they are smart in their decision.
7. Elephants don't gallop, zebras do
Stock prices of big companies with large capitalisations move up or down rather slowly compared to smaller companies because there is not much market ignorance on big companies to capitalise on.

Hence, smaller companies tend to reward its investors more handsomely.

8. Be a braveheart
You need 'cash' and 'courage' to be an equity investor. If you are prone to panic at losses, remain invested in fixed deposits with banks and government bonds.

If you don’t know who you are, the stock market is too expensive a place to find it out!

9. If you throw peanuts, you get monkeys
Investors make the mistake of not buying good stocks at high prices as also buying bad stocks at low prices. A lay investor tends to buy unsound companies at cheap prices instead of solid companies at high prices.

10. Lose the battle, win the war
Equity investment cannot maximise your income, but it can maximise your wealth. The actual yield by way of dividends on equity shares with reference to their market value is often as low as one per cent on investment.

But capital appreciation in equity values can be insanely high. Ask the initial investors of Infosys or Pantaloons.

Also read: Make crores, now!

11. As you sow, so shall you reap
Saving for investment is not a punishment. Investing is making conscious choices about how you will use your money. It is not about choosing to live rich or die rich.

It is about how you want you and your dear ones to live during your lifetime and thereafter.
Here are a few more pointers.
i. There is no 'high' price or 'low' price of a stock. There is only the 'market' price.

ii. Absolute price of a stock is not relevant. What is important is whether it is underpriced or overpriced.

iii. You can't control the market but you can control your reaction to the market.

iv. Intelligent investing is knowing 'what' to buy; smart investing is knowing 'when' to buy.

v. Your profit is determined by your purchase price and not your sale price.

vi. Don't ask the price of the stock, ask the worth of the company.

You are ready to go and need to search for a broker. Keep these in mind.
a. Don't expect your broker to help you to earn 'for' you. He is there to earn 'from' you.

b. The sub-broker makes money. The main broker makes money. Two out of three making money in a single transaction is not a bad bargain.

c. Never ask a broker whether you should buy a particular stock. It is like asking a barber if you need a haircut!