To take advantage of the sentiments of daily traders, stock brokers providing trading accounts also offer money to the daily traders and often on a high rate of interest.
The fluctuations in stock markets pose a risk on equity investments. Even if investment is made in a good company, an adverse market sentiment may result in a steep fall in the stock price of the company till the markets recover.
As volatility is an innate nature of stock markets, it’s said that investors should invest in equities only for the long term, so that they may wait till the recovery of the markets.
In fact, over a long-term period, markets go up, but not in a linear way like that of fixed-return investments. Despite daily fluctuations, the long-term average of stock markets go up, giving good return to the investors in the long run.
As per the history of BSE Sensex, investments made in the index stocks have never given negative return over a 10-year period.
However, the daily fluctuations provide an opportunity to earn daily return by investing in dips and redeeming in ups. This makes daily traders stick to their trading terminal during trading hours to make daily gains.
However, daily trading is addictive and small gains compel the daily traders to take higher risks and invest more for more gain.
In their quest for earning more, small-term investors even borrow money to invest in stocks. To take advantage of the sentiment, stock brokers providing trading accounts also offer money to the daily traders and often on a high rate of interest.
In case of markets crash investors need to wait for market recovery to ensure gain on investments. However, in case the markets take a longer path to recovery, the investors invested the borrowed capital suffer the most.
While the investors, who have invested their own money – not their emergency funds – may wait patiently till market recovery, interests keep on accumulating for the investors, who have invested borrowed money, forcing them to redeem at a loss.
“An investor while making any investment certainly takes into account the credibility, liquidity and period of investment. Any investor who invested out of own funds can be resilient and should wait for an opportunity to exit at the targeted price. In case of borrowed capital it is important to weigh between the cost of funds and the return on investment,” S Ravi, Former Chairman of BSE and Founder & Managing Partner of Ravi Rajan & Co.
In case the investments made in stocks with liquidity issue, selling stocks to minimise interest payout may also become difficult for the investors, who have invested borrowed money.
“Exit strategy in case of illiquid script, it is important to monitor the liquidity. A resilient and intelligent investor weighs all options before exiting. Close monitoring and holding on to the investment for a reasonable period can be a good strategy,” said Ravi.