Name: Sanjay Gupta*
Age: 23
Profession: Web designer
Location: Mumbai
Sanjay began working at the age of 20, whilst still studying in college. Besides work, he loves to read, listen to music...and invest in the stock market. He made his foray into the stock markets, in his college days, while his other classmates were still wondering how to crack exams.
“I used to watch business channels and found it exciting. Some relatives and friends invested in stocks. I was kicked!" he says. However, while his uncles made a good profit, he lost Rs 40,000!
What my friend recommended
When in college, Sanjay did a couple of freelance assignments for which he got paid anywhere between Rs 5,000 to Rs 20,000. Sans wasting a minute, he would buy stocks like Reliance, Wipro, Infosys, etc, with the money.
He had no clue whether they were good or bad. He just bought what was recommended by his friends and relatives! Worse still, he even believed in the ‘tip’ given to him by his broker to invest in a couple of other stocks.
Quick bucks
Within the first three months, Sanjay booked a profit of Rs 15,000. Happy with this profit, he invested a little more money, this time round. He raised the amount from Rs 10,000 to Rs 15,000.
To rake in more money, Sanjay soon began intraday trading and got into margin trading (borrowing money from the broker to buy stocks). Within eight months he had invested Rs 40,000.
Margin trading
For the uninitiated, margin trading is when the investor borrows money from the broker to buy stocks. But the investor has to settle the transaction at the end of the day -- we call it intraday trading. Sanjay made good use of this option.
He bought shares of the company on which he received a margin of 50 per cent. So, for a share that cost Rs 500, he would pay only Rs 250 from his pocket and the remaining was funded by the broker. When the share price climbed to Rs 750, he made a complete 100 per cent profit on it.
But as a margin trading rule, Sanjay had to clear the settlement at the end of the day either by paying from his pocket for the loan given to him by the broker or by selling his shares. Sanjay understood the gravity of this situation only when the market plunged badly. The price of his shares reduced from Rs 500 to Rs 250 and he began to make a huge loss. Initially, he lost Rs 5,000 but later it came to a point when he lost every penny invested.
Obviously, margin trading works provided you know the market well, and it could backfire if used too often. This is what happened in Sanjay's case. He kept on margin trading and lost all his money.
Why people lose money
- “Greed is one of the reasons. And people end up making bad decisions," says Yogesh Chabria, founder of GSIFS.com.
- “Not understanding the market well before investing, is another. People tend to believe market rumours and tips.”
Smart tip: keep it simple
“Invest only in good stocks and stay put for a long-term,' says Chabria.
But how do you identify good stocks?
- Keep watch for good companies, which can be tracked on the basis of its balance sheet, details, future plans, profits/loss made in the past, performance record, etc.
- The key to making profits is staying invested in good companies for the long-term.
Sanjay realised these mantras only after losing all his money. Today, he is very careful with his stock investments. Before investing in any company he makes sure he has done enough research and homework. He has now recovered all the losses he had made.
He says, “There is no shortcut to earning money. Just pick a few good stocks and stay invested in the market for a long-term. Only then it makes sense to enter such a high-risk investment platform.”
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