A young person very dear to me had asked my opinion about trading in
stock markets. This is what I replied to him via an email on 2nd of January,
2010. People have several notions on trading in stocks. They want to make money
without having any basic knowledge about what they are getting into.
Letter to a Dear One on What to
Know Before Dabbling in Stocks:
02 January 2010:
My Dear xxxxxx,
I've gone thro the file sent by the broker, ShareKhan
to you. 'Special' in English language is a magical word. It works as a
wonderful selling point for several marketing people. If you add 'Special' to
any product, it sells more!
You see it in your daily routine when you go to
malls or markets. Gullible people like you fall for such 'Special' offers
though there won't be anything special about them in most of the occasions.
Before I start answering your question, please give
your feedback on the following:
1. Why have you suddenly decided to start trading
in Indian Equities?
2. Do you have any financial constraints or do
you want to diversify assets? (Sorry, dear one, for my bluntness!)
3. What is your understanding of the share market
in particular and financial markets in general?
4. What is Nifty?
5. What is a put option?
6. What is a European Option?
7. What is strike price?
8. What are index futures?
9. What is PE ratio?
10. How many annual reports of Indian companies
have you read so far?
11. What is EBIDTA?
12. What is the link between Indian interest
rates and Indian equity markets?
13. How connected is Indian stock market to other
global equity markets -- like, Asian, Chinese, HongKong, Dubai, US, London,
German, Turkish, etc?
14. What are the main ecnomic [sic] indicators in
India?
15. What is Top Down Approach?
16. What is the difference between paid-up capital
and preference share capital?
17. What is DE ratio?
18. What is your understanding of Indian Corporate
Tax Laws?
19. What do you understand by BOP's relevance to
exporters/importers?
20. What is the difference between options and
futures?
21. What is the difference between trading and
investment?
22. How much money do you want to make from shares
trading/investment?
23. How long do you want to remain invested in
stocks?
24. What is your understanding of the Balance Sheet
and Profit and Loss statement?
25. In November, when Dubai Govt defaulted in its
debt obligations to internationl [sic] creditors, why have the stock markets
across the world have fallen by 5 to 7 per cent in just a matter of two
days?
I'll be eagerly looking forward to your sincere
reply.
BE HONEST! Honesty pays very well when you reveal
everything to your doctor! Likewise, to have a realistic understanding and to
know what we are helps in understanding our outlook on wealth and life in
general and share market in particular.
Don't mistake me, my dear one, these questions are
very much essential before you jump in to the world of financial markets...
If you give a sincere reply to me, I shall help you
in making good money in stock markets...
Happy investing,
Yours as always,
Rama Krishna V
- - -
P.S.: By now, you may
have guessed that this youngster has never replied to my email. After several
years, he told me he traded on the markets heavily and lost some money despite
what I wrote to him.
Disclosure: I've vested interested in Indian stocks. It's safe
to assume I've interest in the stocks discussed, if any.
Disclaimer: The brief analysis provided here is only for
information purposes and should not be construed as investment advice.
Investors should consult their own financial advisers before making any
investments. The author is a CFA Charterholder with a vested interest in
financial markets. He blogs at:
