Stock Market – The Game of Gambling…

  • SumoMe

Mankind has always been fond of gambling. Since time immemorial we have been engaging in games that test our luck more than our skills; the most profound example of this being the Mahabharata, where the Pandavas put everything at stake for a game of “chousat”.  The options available now are more:  sports betting, the casinos and the most colorful of all – the stock market.

What fuels this desire for gambling? Is it the money, the adventure or the sheer pleasure of getting something one does not deserve? In most cases it is a combination of all but the mix is more inclined towards the adventure and thrill associated with it.

My college professor spent a good 5.5 hours to explain the difference between investing and gambling. He said that an activity is gambling when the probability of an outcome cannot be quantified. I was not convinced and so was thrown out of the class. But the question still lingers on my mind “What is the difference between gambling and investing?” My friend says that if it is legal and when you make profits and if you have a reasonable theory as to why it happened it is called investment otherwise gambling.

The focal point of this write-up is, what I call the sophisticated game of gambling – Derivatives or Futures and Options. Every morning on every business news channel you have the so called market experts predicting the course of market or Nifty for the day. The funniest thing is that these analysts have limits set for the upward as well as the downward movement which shows that they are equally clueless about the market as you and me or they don’t want to disclose their trade secrets. While in the afternoon during their post market sessions these analysts say that market went up or down as they said and round it up by some justification which almost everybody who knows something about the stock markets can figure out.

But never the less the game is extremely alluring and interesting. And mind it it’s not only the money but the fact that you can say “see didn’t I tell you?”

How to play the game? It is simple. You trade either in Nifty futures or options. Options are preferred by most as it involves putting less money at stake and chance of getting higher returns. A higher return obviously means higher risk, but then if the risk is not high what’s the fun.

Firstly you have to forget most of your book definitions about futures and options that call these as instruments used for hedging. Trust me, these are purely speculative instruments.

For our understanding we will refer to them as assets only. The technical details like the lot size the expiry etc. can be availed from your brokers. What I would like to focus her is how to play the game.

Well there are a few factors that determine the movement of the market namely the global cues, economic cues, company specific cues; and one special and exclusive factor applicable only to the Indian markets is the “scams”. I will deal with them one by one.

The global cues include the movement in oil prices and performance of other markets. Mostly the Indian market follows its Asian counterparts like china, so if china is going down Indian markets will also act week. Other important cues are the political environment in the world; a stable political environment is crucial for healthy performance of the market and yes last but not the least crude oil prices. This one is a tricky one, rising oil prices is good as it shows increase in consumer demand and thus growth of economy, however if the increase is way too much it will lead to inflation and higher input cost which is not good. The best example is the unrest in the Middle East that has caused the oil prices to shoot up and the indices all around the world to go down. The political tension between the two Korean nations also played its role to shake the world markets in the recent past.

The economic cues include the GDP growth rate, inflation rate, commodity prices etc. If the economy in general is doing well the market sentiment is positive and the indices are likely to perform well. The company specific cues usually determine the fate of a particular stock, however these stock only constitute the indices like Nifty and Sensex. Coming to the special factor of “scams”, you name the industry and there is scam either in the news or in the making related to it. The case in contention here is the 2G scam that has gripped the telecommunication industry and swayed the markets in general by a storm. You never know how many more scams will surface, once the cookie crumbles.

To summarize discounting all of these factors at the same time and taking a call on the movement of market is a little difficult. However, usually a few of these factors only will dominate in deciding the course of the market. If you are able to nail these down you have almost hit the bull’s eye.

A final word – be cautious, have some faith and exercise a strict stop loss and yes be patient. The game is not that difficult but risky. Let’s play, see you at the table (market)… Winner Winner Chicken Dinner…

Nitish Kapoor

Image Source: [http://www.flickr.com/photos/bransorem/3277905392/]

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