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Who is getting richer: you or your broker? - Views on News from Equitymaster
 
 
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  • Feb 28, 2011

    Who is getting richer: you or your broker?

    Have you ever given any thought on this topic? Irrespective of your answer. Let us discuss this as the answer is very important if you are in the stockmarkets and want to make a meaningful return.

    Most of the retail investors love to hear these two words "TARGET" and "STOP LOSS". Why? We want everything instant. We don't have much patience as we are living in the world of instant pizza, instant coffee etc. But we always forget that this is not applicable in every realm of life. And same concept goes with the trading (buying and selling several times or doing one value investment and wait for a meaningful return).

    Now before drawing any conclusion let's demystify this ubiquitous word "TARGET". Take an example of a stock trading at a price of Rs 100 and target is given Rs 115 with stop loss of Rs 95. Loads of brokers give same kind of suggestions to their clients and "combined belief manufactured by brokers" starts working. Stock starts moving in a direction and we start believing that brokers are genius. When stock comes at the suggested entry price, everybody starts buying and stock moves up. We all end up making money.

    When the stock comes down to stop loss price, everybody starts selling. And stock goes down and we think that brokers have saved us from making further losses by suggesting stop loss. Sometimes we make small gains and sometimes we lose. In the whole process on the net basis we hardly make any money or just lose our hard earned money. But pay our brokers all the time while foolishly buying and selling the same stocks.

    Just think where these brokers were when the same stock was trading at Rs 90. Wasn't the stock more attractive at that price? Why suddenly at Rs 100 they are suggesting you to buy? You will understand that by creating a combined belief on a particular stock they just want you to trade and pay them brokerage. Nothing more than that! Even research shows that traders make the least return and concludes that 'trading is injurious to wealth'.

    Then why do we trade? The joy and excitement of making quick bucks make us trade. This is the reason for all the brokers surviving and making money in the stock market. There exists a great demand for commodities like "TARGETS" and STOP LOSS" and brokers are the only suppliers.

    Interestingly in the whole process apart from brokers a few intelligent people also get rewarded. These are the patient value investors. As they know the real value of their purchase. And when combined belief of the market makes stock overvalued or undervalued, they reap the benefit. All great value investors like Warren Buffett, Benjamin Graham and George Soros never believed in trading rather they were the beneficiary of inefficiency created by traders. So Warren Buffet rightly states "had the market been efficient, I would have been a Bum in the street with a Bowl in my hand"!

    What we are saying is nothing new. But this is something which is always ignored and pushed under the carpet. It has been like this for decades. Now you need to decide what you want. You want to make yourself wealthy or your brokers and intelligent value investors...

    At the end we would suggest you one thing "Stop Trading" and "Start Investing". It is better to trust the age old philosophy on fundamental analysis and value investing to ensure that you pick up sound investments. Rather than losing money in quick trades.

     

     

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    10 Responses to "Who is getting richer: you or your broker?"

    prerana

    Mar 10, 2011

    knowledge of any kind is right way to do the thing....though i dont know how much statistics will help....as i dont statistcian becoming great investor or money maker in stock market.....rather fundamental analysis with the help of mathematics will help.....as article says abt benjamin , warren buffet , soros etc

    Like 

    Girish kumar

    Mar 10, 2011

    The investor who will do the home work on particular stock with knowledge of statistics calculations will reap fruit 90% without fail /with out deviation. one should have gain knowledge.. insted of speculated brokers/other parties words.

    Like 

    vivek

    Mar 8, 2011

    rightly said....mostly we forget the tax implication as we think we wont pay tax....but we must the actual return after taking tax into account....if u take everything into account like risk, tax, cost of trading , tensions etc etc.....u will come to the same conclusion as article rightly conclude....u r making broker richer...

    Like 

    Sanjeev Shandilya

    Mar 8, 2011

    I think this article is gr8 & they are saying correct things.This is superficial ,,,,,,,

    Like 

    ahmed

    Mar 7, 2011

    hey.....really nice article.....i too agree with the fact that one must calculate everything like brokerage, tax implication etc before doing trading...other wise like the article said..he will finally lose

    Like 

    Akhilesh

    Mar 4, 2011

    Dear Pats

    I totally agree with your comments on the type of the people and their behaviour on stock market.....

    but if you see the 2nd para of the article, it starts addressing "most of the retail investors"......so your 3rd and 4th catogaries are out of purview of this article.....and when it says "most of the retail investors"....it excludes 2nd catogaries also......

    you rightly said that everyone should not be painted with the same brush.....but fundamental analysis and value investing are something good for everyone....

    but yes, this is not meant for everyone...this article is for those people who don't carefully judge their financial actions.....

    Like 

    Vinod Kumar

    Mar 4, 2011

    Certainly Brokers. The investors are losing Hard earned, saved Capital and above all Mental Peace, the beggest Loss.

    Like 

    velamuri sundari

    Mar 3, 2011

    90%of people don't invest in stocks except maharastra and gujarath. most of the investors look for the day profits. like fiis; hnis. when the market is high these very people the analysts say the market is of high value. it needed to be corrected. broking community says if you are in the profit sell it off. if you are not in the profit also sell it off you can buy the same stock much cheaper.
    retail investors who are habitual of all these wait for the right time to exit or to enter. speculators they enter the stock in the hurry and exit in a hurry and sometime burn their fingers(some times they burn their body itself.)
    even the valued investors or the long term investors some times burn their fingers by entering the stocks with unusual recommendations of the broking or analysts community if they are not investing in the stock without their own judgement. once you are putting your own money in stock market we must be very careful where you are deploying your cash for the maximum returns.

    Like 

    abhishek

    Mar 1, 2011

    you

    Like 

    Pats

    Mar 1, 2011

    Though the article seem to make sense in a way, the other side of the coin is:

    There are four types of people in the market:

    1) who want to make daily profit (their full time is spent only on trading)

    2) those who work elsewhere, but invest and wait for growth (so called value investors)

    3) those who don't want to take direct risk (due to lack of time or knowledge, or due to fear, or the wise who want to put few eggs in equity basket) but want to taste the benefits of stock market - they invest in mutual funds

    4) and the last (the vast majority): who don't care about the stock market at all. They don't invest in stocks or mutual funds.

    It is the 1st type of people (the part-time, full-time traders) who are anyway aware of the costs involved in their trading and still make money. They do their calculations before buy/sell a stock & before activating a target/stop loss.

    Painting everybody with the same brush is no good.

    Like (1)
      
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