The Devil's Casino

Prottoya Chowdhury | Published: September 07, 2018 22:08:17

Bengali culture and conventions often brand the equity markets as a gamblers' paradise and the fool's alchemist-like approach to change and grow pennies into billions -- leaves all that in the dust. The general consensus in Bangladesh regarding the equity markets is based on skepticism and the lack of specific knowledge regarding the field; studying economics, conducting experiments in different fields of finance and engaging at the corporate and executive level in any business may all have several key similarities with investing in and trading inequities and securities, but the true nature and skill set required for this discipline cannot be found anywhere but the equity markets all around the world. Contrary to general opinion, investing in and trading inequities require working and adaptable elementary knowledge on the operating principles and mechanisms of the specific market where capital is being invested. In addition, staying updated on the latest global and local headlines that are likely to impact the market is important, as well as digging through a variety of financial and price sensitive metrics and conducting independent valuations for each prospective security that an investor wishes to add to his or her portfolio. In countries with conservative societies similar to that of Bangladesh, it isn't difficult at all to find 'equity bear market gurus'. It is imperative for people taking their first steps in the equity markets to ignore these myths. Investing and trading are both art forms in their own respects, with each demanding a different mindset and a set of skills that require years to polish and perfect -- people skeptical of them are merely living under a financial hoax.

Interchangeability is not synonymous in the equity world. Investing and trading, two terms commonly used in this regard, imply two different sides of the coin. Investing capital in any market is done primarily based on the barebone economic and financial indicators of a nation -- mainly GDP (gross domestic product) growth, unemployment reports, expected job growth, expected increase in GDP per capita, bond yields and the general bull and bear market cycles. For a person unfamiliar to the implication of these metrics, these gauge the long term potential of the general economy of a nation, hence making investing popular among people looking for undervalued or growth securities and intent on creating a diversified portfolio that spans several sectors. Under normal circumstances, people who invest in the market look to realise their gains within 3-5 years for bull markets and about 1-2 years for bear markets. Day to day fluctuations as a result of volatility -- a term that refers to the abruptness of price movements in securities and indexes- are not of much concern to an investor, and yearly gains or losses that match or outperform the indexes of the respective exchange are satisfactory for the investor. Investors also have an increased appetite for losses and generally decide to exit a losing investment after it has breached a decline of more than 15-20 per cent, indicating that the security has entered a bear market, from where there is a stronger likelihood for the security to proceed into deeper losses and go through a crash, which is generally a decline of over 50 per cent.

Several things that investors pay close attention to are quarterly earnings reports and conference calls of the respective company they are invested in, EPS (earnings per share growth per year), company revenue increases and consumer demands for the products of the company. One of the key elements to creating a sustainable and efficient portfolio capable of hiding risks and delivering consistent returns for investors is diversification. Educated investors tend not to invest more than 10 per cent of their entire portfolio in a single security and often limit it to 5.0 per cent, so a general investor should have between 15-25 securities in his or her holdings. Primary income sources for investors during their holding period are dividends, which are the earnings of their respective companies distributed among shareholders on a quarterly or annual basis. Healthy increases in dividends, in addition to keeping an investor interested in holding shares, signal a healthy financial outlook for the company, if it is able to maintain and boost its current operations.

Investors who decide to buy and hold a certain amount of shares of a corporation for a long span of time, under certain circumstances, liquidate their positions right before the tipping point of a confirmed market-wide recession. To predict the possibility of a market recession, investors pay close attention to bond yields and the yield curve- -- which plots the yield of long term bonds against short term bonds. Bond prices move inversely to that of securities traded on the stock exchanges; higher bond yields correspond to low demand for bonds and vice versa, as investors flock to better performing securities and bond issuers are inclined to pay more interest to attract investors. Normally, a upward trend in the bond yield curve indicates a strong bullish economy, but when the yield curve starts to dip, indicating a decreased spread between short term and long term bond yields, the bullish economy has a high probability of slipping into bear territory, at which time investors opt to liquidate their positions and maintain hefty cash positions.

Trading is the more fluid form of trading and subject to higher volatility and swings in an individual's portfolio. There are plenty of subdivisions of trading, which range from scalpers and day traders- traders who hold shares for as little as a few minutes or hours- to swing traders- traders who trade based upon market sentiment and momentum and hold their positions for an average of approximately two months. The shorter the term of trading, the less it is dependent on economic and company financials and the more dependent it is on volatility, price actions and technical analysis. Technical analysis provides the user with information regarding the inflow and outflow of cash in the security and the general market sentiment through a variety of oscillators and indicators, such the MACD, RSI, Money Flow Index and Stochastic Indicator. Trading requires the individual to closely monitor these oscillators and indicators and positions are often exited at the slightest loss or gain, often ranging from 2-10 per cent. Traders often derive buy and sell signals for the securities they are trading in by seeing patterns and watching for certain movements in the oscillators which indicate a strong possibility for the security to move in a particular direction.

The closely-watched indicators for bullish and bearish price actions are simple moving average crossovers and divergences. This form of technical analysis makes use of two simple moving averages- one averaging prices of a security over a shorter span of time than the other- watches for the shorter term moving average line crossing above and below the more stable,  longer moving average. Short term traders often employ a pair consisting of the seven and nine-day simple moving average or a pair consisting of the 10 and 20-day moving average. However, it is important to note that different settings and time frames for technical analysis can yield different indications for the price movement of the respective security, and that shorter term indicators are more susceptible to giving false buy and sell signals. For this reason, new traders in the market should initially avoid trading securities for extremely short periods of time, as their inexperience in the market is likely to result in large losses in the beginning of their trading career.

The most important concept for investing and trading is to judge and predict the right time to enter in positions in the markets; one of the most common mistakes new investors make is jumping on the bandwagon, when it's too late- entering in positions in securities that are overhyped and overbought and hence largely overvalued- and immediately experiencing a significant loss which is unlikely to break even in the short term. One of the key rules that experienced investors and traders follow is controlling their impulsiveness and tendencies to join in with the majority of investors and traders- the majority of people entering the markets exit it quickly, empty-handed and disappointed, while the people with growth mindsets endure through and derive their success from countless hours of self-studying, listening and plenty of patience. Successful investors normally wait for drops in overbought securities which are due to a round of selling, poor earnings results that the company is likely to improve upon or overreaction to a certain piece of information regarding the security- despair in the markets is the calling for the experienced investors and traders, who file in and grab shares of securities at cheap valuations and pocket handsome profits within their respective holding periods.

The mindset, thinking and attitude of an investor or trader is different from that of regular citizens engaging in trading equities: traders and investors are stoic personas in a financial world filled with overreaction, captivating price action and immense stress. Stress and nervousness regarding the realisation stages of their investments are common for even the most skilled traders and investors, but they never connect with their money and their holdings at a personal level. Emotion regarding one's own financial assets or infatuation over a single loss spells disaster for any investor or trader; joy over gains is another killer, making an investor or trader overflow with pride and pomp regarding their prowess in the financial markets, and setting them up for a probable failure in the future. In addition, patience and strong willpower are imperative for any investor or trader. Timing the market for highest returns is impossible, but patience does an excellent job of recovering losses and turning them into gains; early losses should not derail an investor from holding his position. The investor or trader must believe in the performance capabilities in each and everyone of his or her holding, and exit positions when adequate gains have been made or losses start to deepen.

The people living in society must break through their bubble of speculation and doubt if they ever wish to get a true taste of the equity markets. Equity markets are no safeguards for wealth and neither are annualised returns guaranteed, but with time, effort, patience and bit of courage, it is possible to create a winning portfolio that continues to deliver a steady stream of returns to the trader or investor. Investing and trading can be a good source of supplementary income; however, the best aspect of investing or trading is that gains grow exponentially every single year and the gains aren't withdrawn, resulting in returns increasing over time. With that said, the "Wall Street Wizard" awaits every single person with an interest in equities at the door of the financial exchanges.

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