Greed and fear are normal human emotions. In stock market operations, these emotions exercise a huge influence. In a bull market greed becomes dominant; in a bear market, fear can grip investors. Successful investing demands that greed and fear are kept under control.
In the ongoing bull market, greed has gripped many investors/traders who are speculating in the market, throwing all caution to the winds. The regulator SEBI has repeatedly cautioned investors about the pitfalls in excessive speculation.
Covid-19 has influenced the Indian capital market much more than any other recent event. The Covid lockdown enabled newbies to swarm into the market. Easy online onboarding of clients and the spectacular returns from the market after the Covid crash helped in the explosive growth of demat accounts from 4.09 crores in April 2020 to above 13 crores now. More investors entering the market is desirable. It accelerates the process of financialization of savings, contributes to the healthy growth of the capital market and the economy, and enables ordinary people to participate in the wealth creation through the stock market. So, without a doubt, this is a healthy and desirable development.
What is not so desirable and distinctly unhealthy is the rising trend of unbridled speculation in the market. In a bull market, stories of big money made through the stock market gain currency. It is true that big money can be made from the stock market. But this requires systematic investment and lots of patience. Those who want to ‘get rich quickly’ are not willing to go along this time-tested route to success. So, they get lured into the speculation trap. And, in this age of technology and social media, there are a whole host of ‘gurus’ promising the newbies ‘quick money’ through speculation.
It is well known that trading in futures and options is a recipe for losses for 90 percent of traders. Various studies have shown this to be true all the time. Yet millions of traders are venturing into this dangerous game and losing money consistently. In 2023 Indian investors traded 85 billion option contracts, more than anywhere else in the world. India has been on top of the charts in F&O trades since 2019. The fact that India is ahead of even the US in the volume of option contracts indicates the depth of excessive speculation in India. A Bloomberg study shows that in the year ended March 2022, active traders in India lost $5.4 billion. This amounts to a loss of $1468 per head: a big amount in a country with a per capita income of $2500. Despite this loss, traders driven by greed, are indulging in excessive speculation in the market. Another disturbing trend in the market is retail investors chasing low-grade small and micro caps. This is another recipe for disaster. Surprisingly, fear is very low in the market. Investors should remember the famous Buffet quote, “Be fearful when others are greedy.”
The excellent returns from the market after the Covid crash (Nifty almost tripled from the Covid low of 7511 in March 2020 to above 22000 now) have contributed to the newbies rushing into the market driven by the FOMO factor. The time-tested route to building wealth is through systematic and patient investing, not through excessive speculation.
