Buying, selling, trading, stop loss, futures & options, intraday and many other such fancy terms are commonly used in the stockmarket. Such jargon is especially flaunted by market professionals like stockbrokers. Further, 'savvy' investors who deal in the market often are all expected to know the ins and outs of this kind of stockmarket lingo, lest they be considered novices.
The above terminology contributes towards the Dalal Street culture. A culture where you are somehow made to feel that if your intention is to make money in the market, you need to be doing one or all of the above on an ongoing basis.
But give it some more thought, and you realise that these all have one thing in common. All of these terms, effectively, are chances for your broker to make money.
So logically, the next question that arises is - is that merely a coincidence?
Maybe! Maybe not!
To get some clarity on that question, we would need to get back to the basics. What exactly are shares in the first place? Shares of companies are nothing but a part ownership in a business. They effectively make you a partner in the business from an economic perspective. Depending on the number of shares you hold in relation to the total shares of a company, upon buying shares in that company, you will own the assets of that company in the same proportion. You will also be the rightful owner of all the future earnings of the company in the same proportion.
If that is the case, then what do you think is the logical way to make money out of that? Choose a business you like, run by a management you trust in.
If you choose your business well, you become a passive owner of the business. Meaning, from then on, you have to just sit tight and watch the business grow as it makes profits, gives out a part of it out to you as dividends, and reinvests the rest to grow bigger in future.
If you have done your initial work in choosing the company well, then you can safely expect it to earn returns much higher than what you would get by investing your money elsewhere.
Further, you need to only occasionally check to see if all is going well at your company and that nothing has fundamentally changed in the way it does business. If something has fundamentally and permanently changed in the business because of which you feel it may not be able to perform as well as before, you might think of selling.
Unless that happens, all you have to do is just sit back and enjoy the fruits of having chosen a good company that fetches above average rates of return on the capital invested in the business.
But were you to merely do only that much, what would happen to your broker? It will indeed be a broker's nightmare if all his customers start thinking this way. For your broker makes money not on whether you have chosen a good quality company for the long term, nor does he make money each time you make money. He only makes his money when you frequently and rapidly get in and out of various businesses. In other words, he makes his money when you 'buy', he makes his money when you 'sell'. Better still, he makes his money when you 'trade' i.e., buy and sell frequently.
The quicker, the better!
Seems like it is in his interest to create the kind of hyperactive, transactions oriented culture mentioned at the start of this article. One where the target price is as close to the current price as possible. And one where a long term horizon is not more than 3-6 months long. All so that you do not even think of choosing a good quality business where you can enjoy the fruits of its business for the next few decades without doing anything more than that.
Your broker's and your interests are not as aligned as he would like you to believe. The next time you receive advice from your friendly neighbourhood broker, you would do well to remember this one important point. It may not only save you some money, it may also help you make much higher returns over the long term.