New stock investors on the block

With beginners taking to trading with enthusiasm, experts are worried that a rough experience could make them defensive in the future

With beginners taking to trading with enthusiasm, experts are worried that a rough experience could make them defensive in the future. SANJAY KUMAR SINGH writes

Udhampur-based Neha Gupta, 29, has been active in the stock markets for the past six months. “The lockdown has given me the time to read up on companies, do a proper evaluation, and then invest,” she says. Being risk-averse, Gupta has stuck to large-cap stocks that are sector leaders. Alas, not every new investor who enters the stock markets treads as carefully. Influx of new customers:

A large number of new investors entered the markets during the lockdown. “Ordinary investors, who would punch in a trade once in a while, became traders during this period as they had ample time at their disposal,” says V K Sharma, executive vice-president, HDFC Securities.

Stockbrokers have witnessed a spike in account opening. “We saw a 300 per cent increase in the monthly account opening numbers from March to June. The number for the first six months of 2020 has surpassed the total for 2019,” says Nithin Kamath, founder and chief executive officer (CEO), Zerodha. While 15.7 lakh new demat accounts were opened with NSDL and CDSL in JanuaryMarch 2020, the figure rose to 21.96 in AprilJune. Trading volumes were also up. In the April-june quarter, cash market volume rose 34 per cent quarter-on-quarter and 61 per cent year-on-year, while derivatives volume fell 5 per cent (on NSE and BSE combined).

Several other factors also led to people entering the markets. “Those who missed out on the post-demonetisation rally are keen not to miss out on the opportunities thrown up by the recent correction,” says Jimeet Modi, founder and CEO, Samco Securities.

According to Kamath, low interest rates on bank fixed deposits have also brought new investors into equities.

However, investing directly in stocks is not for everyone. “For 99 per cent of people, the most optimal way to get equity exposure is through the exchange-traded fund (ETF) and diversified mutual fund route. Only one per cent should invest directly," says Jatin Khemani, founder and CEO, Stalwart Advisors, a Sebi-registered independent equity research firm. Most investors who enter the markets without adequate knowledge get their fingers burned and then swear off equities. Some of the common mistakes newcomers make include: Betting on penny stocks:

Many investors have in recent months been investing in stocks that are priced at ~3-5 . “Some have made money because of the gush of liquidity that has come into the markets. But most of these stocks are heavily burdened with debt and have poor business prospects. After some time, their prices could collapse and retail investors may not be able to exit them in time,” says Modi. Short-term orientation:

Engaging in intraday trading is the biggest mistake novice investors make, according to Bengaluru-based Naufal Iqab, who entered the markets two years ago. Sharma says these investors compound this mistake by not using stop losses.

The market has rallied since it touched a low in the last week of March. Investors who entered the markets recently have made money. They could end up attributing their success to skill rather than to luck. “Newcomers think the markets will always be a one-way street and making money will be as easy as it was in April,” says Sharma. Not paying heed to valuations:

Getting the entry price right is crucial. People are spending only on essentials currently, so FMCG, telecom companies, etc are expected to do well. However, smart investors would have entered such stocks early. “Someone who enters them late, when prices have run up, could earn lower returns, or even sustain losses,” says S G Raja Sekharan, lecturer on wealth management at Bengaluru's Christ University. Investing in leveraged instruments:

Many investors start dabbling in the futures and options (F&O) segment at the outset. “Stick to the cash segment of the equity market. That way you will only lose money you have. Leveraged bets can magnify your losses,” says Raja Sekharan. Make a cautious entry:

New investors should start out with low-cost index funds, according to Kamath. Those with access to an advisor may opt for actively-managed funds. Invest only a small portion of your surplus in direct equities initially. “Even if you lose this money, treat it as tuition fee paid to learn how to invest,” says Khemani. He suggests building a diversified portfolio of 20-25 stocks, belonging to different sectors, and limiting exposure to each stock to 5 per cent of the portfolio.