The Indian trading market is a magnet for novice investors and traders globally. However, it also draws the attention of scammers. It’s crucial to remain vigilant in the stock market to evade exploitation by fraudsters. In recent years, more people in India are becoming investors in the stock market. Although it’s still a small percentage compared to the total population, a significant number of households are now investing in stocks. This trend shows that more families are putting their money into the stock market than before.
Introduction
Currently, there are 80 million individual investors in the stock markets. This number matches the unique PAN (Permanent Account Number) holders, and we expect it to reach 90 million soon. The National Stock Exchange (NSE) has around 160-170 million accounts, but when duplicates are removed, there are 80 million unique accounts. The number of investors is growing, especially in the last 2-3 years, thanks to mobile phones and applications that make it easier for people to save and invest in the stock markets.
Though it sounds like rainbows and sunshine, there are always cons to share trading. The statistics say that as many as 40 cases of online share trading scams were reported last year. The present year has seen a massive surge with 49 and 61 cases being reported in January and February in which victims lost Rs 7.6 crore and 10.9 crores respectively.
The cases in March have seen a further upward trend.
- The 59-year-old retired mechanical engineer took one-on-one lessons in share trading from an online tutor. He ended up losing Rs 3.95 crore of life savings.
- A 38-year-old president of a private finance company attends special sessions on stock market dynamics conducted by an ‘expert’ named Melissa from the UK. He lost Rs 3.5 crore.
- A 42-year-old private firm manager attended online sessions by a ‘stock market guru’ before investing and lost Rs 1.62 crore.
What is share trading?
How does share trading lead to a debt trap?
- High-Risk Trading: Raj engages in high-risk trading, aiming for quick gains without considering the potential for losses. He invests heavily in speculative stocks, hoping for significant returns.
- Market Volatility: Due to market volatility, some of Raj’s investments perform poorly, leading to losses. Instead of cutting his losses, Raj decides to borrow more money to invest in riskier ventures, hoping to recover his losses quickly.
- Accumulating Debt: As Raj’s investments continue to underperform, he accumulates more debt from the brokerage firm to sustain his trading activities. He neglects to consider the interest charges accumulating on the borrowed funds
- Debt Trap: Despite his efforts to turn the situation around, Raj finds himself trapped in a cycle of increasing debt and diminishing returns. The interest on his borrowed funds adds up, exacerbating his financial strain.
- Financial Consequences: Eventually, Raj’s trading losses exceed his initial investment, leaving him with a substantial debt burden. He struggles to repay the borrowed funds and faces potential legal action from the brokerage firm for defaulting on his margin trading obligations.
- Lesson Learned: Raj realizes too late the dangers of speculative trading with borrowed money. He learns the importance of responsible investing, risk management, and avoiding excessive leverage to prevent falling into a debt trap.
This illustration highlights how share trading, especially when combined with margin trading and speculative behavior, can lead to a debt trap if not approached cautiously and prudently. It underscores the importance of understanding the risks involved and exercising financial discipline to avoid financial distress.
Ways to Avoid Debt Trap
When investing, it’s common to make mistakes, as illustrated above but some can be avoided if you can spot them. The most serious errors include not creating a long-term plan, letting emotions and fear drive your choices, and failing to diversify your investments. Other mistakes to watch out for are becoming too attached to stock for the wrong reasons and attempting to predict market timing.
Five most common investment mistakes
While you may encounter some unavoidable trading mistakes, it’s essential not to make a habit of them and to use both successful and unsuccessful trades as learning opportunities.
1. Lack of proper knowledge or research about the share market: While traders may act based on intuition or tips, it’s crucial to support these decisions with evidence and thorough market research before opening or closing a position. Understanding the market type (OTC or exchange), its volatility, and stability is essential before committing to a position, as these factors greatly influence trading outcomes
2. Trading without a plan is like sailing without a map: A trading plan is like a map for your journey in the markets. It includes your strategy, how much time you’ll spend trading, and the money you’re ready to invest. When things go wrong on the market, some traders might want to throw away their plans. But that’s a mistake because your plan should guide every new trade. A bad day trading doesn’t mean your plan is bad—it just means the market didn’t go as expected at that time. To learn from your experiences, you can keep a trading diary with notes on what worked and what didn’t, helping you make better decisions in the future.
3. Investing with money that you cannot afford to risk is a risky move: If you invest money that you can’t afford to lose, it can make you feel stressed and emotional, leading to bad decisions. It’s important to know your risk tolerance, which means how much you’re okay with losing to potentially gain more. Think about what kinds of investments you’re comfortable with, like stocksthat grow a lot or safer options like bonds. Avoid investing money you need for essential things like rent or emergencies. Instead, focus on investing money you’re okay with taking a risk on, as this usually leads to better decisions.
4. Buying High and Selling Low: Investing is about buying stocks at a low price and selling them for a higher price later. However, many investors end up doing the opposite. This happens because investing is not just about the price—it’s also about emotions like fear and greed. Some investors buy stocks when they’re already expensive, hoping to make quick money, instead of thinking about long-term goals. When a stock’s price goes up quickly, more people want to buy it, which makes the price go even higher. But when the price drops, most investors panic and sell, along with everyone else. It’s important to look beyond just the price when deciding to buy or sell stocks, or else you might miss out on good opportunities.
5. Not seeking right advice: Having the wrong investment adviser can hinder your financial goals. Your adviser should be someone who shares your investment philosophy and understands your needs. It’s worth taking the time to find the right adviser, as their guidance can greatly impact your investment success.
6. Another reason can be “day trading”: Day trading is seen as a fast-paced investment option with the potential for high returns, but it also carries high risks. This type of trading is conducted daily by experienced individuals who are experts in the field. Day traders typically require significant capital to invest, often obtained through borrowing by new investors. However, if these traders incur losses, they may struggle to repay the borrowed funds leading them to a debt trap. People can be influenced by celebrities and peer pressure, leading them to seek quick profits without considering the potential tax implications and the consequences if their investment strategy fails.
Conclusion
Making mistakes is common for investors, and the ones discussed in this article shouldn’t discourage you from trading. Instead, they should be seen as valuable lessons to understand what strategies work best for you. It’s crucial to create a trading plan based on your analysis and stick to it to avoid letting emotions affect your decisions.
Elaborating on this, a trading plan acts as a roadmap for your trading activities. It includes your goals, risk tolerance, entry and exit points, position sizing, and strategies for different market scenarios. By developing a plan tailored to your preferences and risk appetite, you reduce impulsive decision-making driven by emotions like fear or greed.
Moreover, sticking to your trading plan helps you stay disciplined and focused on your long- term objectives. It prevents you from deviating from your strategy due to short-term market fluctuations or emotional reactions to market events. Consistency in following your plan can lead to more consistent results and better overall performance in trading.
In summary, viewing mistakes as learning opportunities, creating a personalized trading plan, and maintaining discipline by adhering to it are essential principles for successful trading.
Also Read:https://www.lawyerpanel.org/blog/gold-loan/how-can-i-identify-a-gold-loan-fraud/
