The Stock Trading Markets: Traders and Market Makers and Individuals: Finance Trading Times

The Stock Trading Markets: Traders and Market Makers and Individuals

A request for people who are reading my articles for the first time: Please start reading the articles in chronological order – First article First. This will ensure that the concepts presented here are easy to grasp and the continuity is maintained.

It has been sometime now, and I’ve published a few articles. Some were well appreciated; some were criticized with claims from individuals about how they were able to make good profits from equities. Anyways, I tried to prove with calculations and historical facts that it is really difficult to consistently make money in the market.

However, no one ever pointed out a very commonly observed fact: How are the traders & market makers - who are either working for investment firms or doing trading for a living – how are such people able to survive? How do the ones employed as traders at investment firms able to keep up their job, and how are the ones who are trading for a living manage to earn a livelihood. Well, the fact is that they do make good handsome profits, and they do manage to keep up their jobs and livelihoods.

The concept of EFFICIENT MARKETS: This is a famous story about two finance professors who were walking on a street. Suddenly, one of the professors says to the other, “Wait, I think I saw a 100 Rs. note lying on the street a few yards back”. The other professor stops, thinks for a while, and replies, “It’s IMPOSSIBLE. If there had been a 100 Rs. note lying on the street, it would have already been picked up by someone.”

Actually, what is implied by the above short story is that there are NO FREE MONEY opportunities anywhere in the market i.e. no one can get money for free. If there are free money opportunities, they would already have been utilized by someone else – either as a whole or in bits and pieces. “No free money” is equivalent to NO FREE LUNCH – as commonly heard in the corporate world.

Continuing the explanation for the story above – let’s say you are walking with a friend on a lonely street. Suddenly, you see a few 1 Re. coins lying on the street. Immediately, you and your friend start collecting the coins. Let’s say there are a total of 100 coins lying on the street. Assuming equal efficiency of you and your friend for collecting coins, and each of you take approximately 1 second to collect a coin, then the total 100 coins will be collected in 50 seconds – 50 by you and 50 by your friend. Now, if instead of only 2 of you, let’s say you are walking in a group of 10 friends, and the group spots the opportunity to collect 100 coins lying on the street. Assuming same 1 second collection ability, each of the people in the group will collect 10 coins, and all the 100 coins will vanish in just 10 seconds. Extending the group size to 100, the coins lying on the street will vanish in just 1 second –with each individual pocketing 1 coin, on an average. For 1000 people, only a few will be able to get the coins – some may get more than 1, majority of them will get none. Assuming that coins are divisible, in most of the cases, 1 single coin may be shared by many individuals.

This is exactly what goes on in the markets. The moment there is any news of profitable opportunity, the BIG SIZE of market participants ensures that the profit making is done immediately. Around 2-3 years back, Balaji Telefims (The Saas-Bahu serial TV Company led by Ekta Kapoor), was trading at Rs. 105. It declared a dividend of 16 Rs. a share. Within 1-1.5 minutes the price of the stock reached 121-122 Rs. I acted on this news an hour later and purchased the shares at 122 Rs. After the dividend expiry, the price fell back to 102-103 levels (later even to 85 Rs.). I got the dividend, but I got nothing better than the market price, instead I paid more than the market price after the ex-dividend date. Anyone trying to make profitable trading on such news will have to remain alert and keep a vigil on every single news item that comes out. Not only that, he should also be fast enough to act on the news and place the trades to book profits. Can we individuals do it?

We should understand and realize this fact very well, that the market is full of market participants. Any piece of news, any information that is publicly made available, is utilized immediately in the market. No body can be sure of making exceptional returns in the market by utilizing the publicly available information – In essence, the MARKETS ARE EFFICIENT – which means any news that affects the price of stocks, is IMMEDIATLETY REFLECTED in the stock price (with a change in stock price).

I see people reading Economic Times, Business Standard and Business magazines. They watch business news channels, CNBC, Zee Business, NDTV Profit – all attempting to extract valuable information to take profitable positions for trading or investments. Ultimately, they fall victim to the Efficient Market Hypothesis. They end up buying stocks which are already having the effect of the news included in the stock price. The news can be anything –Company bagging orders worth crores, company declaring a dividend or stock split or other corporate action, company declaring handsome profits, etc. etc.

A colleague of mine acted on a stock split news of a penny stock: IQMS Software. The stock was trading at around 8 Rs. when the news of 1:10 stock split came in. Immediately, the price started to increase and touched a high of 13 Rs. My friend bought this stock in big numbers at 11 Rs. After the stock split, the price had changed by a factor of 10, i.e. his buy price of 11 Rs. was now Rs. 1.10 and the no. of stocks he bought was multiplied by 10 times. He invested a total of around 1.5 Lakh Rs. for purchasing this stock. However, after the split, the stock price started to decline, touched a low of 0.36 Rs. and as of today, it is 0.75 Rs. My friend is waiting since last 2 years just to recover his money. The stock has never made to his buy price of 1.1 Rs.

Let’s take a very recent example of Tuesday 29th May 2007. Indian stock markets went down by around 1.5% -which is a significant decline in the overall market. The reason – China increased the stamp duty on stock trading by 3 times – from 0.1% to 0.3%. Could someone please tell me what has the Indian market to do with Chinese trading charges? At the end of the day, the CNBC Indian Business Hour tells the reason that “Asian markets were affected by Chinese decision, so the Indian markets went down”. Fair enough – what can we individuals do with such news and how much can we benefit from such news – only God can tell. Everyone can give justification for what has happened in the past. Declaring something for future is a dangerous task. Next time will you sit and watch the news coming from China? Thailand? Vietnam?? Definitely not.

Coming back to what I mentioned in the initial part of this article – traders and market makers making profits. They make profits because they have to – otherwise they will not survive. They have to act on every piece of news and take positions accordingly; else they will be out of business in no time. That is what affects the market. Hundreds of such traders, working either individually or employed with investment firms – keep making the trades on every single news item. They loose money, they make money. At the end of the year, they have to show a net profit; else they are shown the door. A typical trader employed at a reputed investment firm gets a fixed salary of around 9-10 lakhs per annum. However, his performance bonus can be as high as 500% of the annual salary, i.e. 50-60 lakhs – solely dependent on the profits he makes from his trades. In 2003, a friend of mine, MBA in finance from top grade management institute in India, employed at a reputed investment firm, had an annual salary of 12 lakhs. He made a handsome profit and got a bonus of 60 lakhs – making it a total of 72 lakhs! However, the next year he suffered losses. Immediately, he was issued a warning from his boss – signaling an exit from the job. He switched the job and today, he’s happy as a consultant with a consulting firm based in Mumbai, paying him a CTC salary of 14 Lakh. You ask him about becoming a trader and his response will be – “It’s a dirty business, stay away from it”. The same will be my response to someone asking me a similar question. The investment firms usually always show profit, because majority of their profits come from brokerage and other deal making commissions. Coming to trading side, at any given time, there will be some traders making money, some loosing money. Even if there are net losses from the trading activities, it will be compensated by the brokerage profits. Winning traders get a share of the profits they make. The loosing traders are kicked out of the job after 1 or 2 warnings, new ones are recruited to replace the loosers and the game continues.

As Mr. Taleb has rightly mentioned in one of his interviews – “If you put enough monkeys on typewriters, one of the monkeys will type a word which is grammatically correct, just by chance. But would you bet any money on the same monkey that he's going to write another correct word next? Definitely not! You know that because of the sheer size of the sample, you're likely to find a lucky monkey once in a while. But will he be able to show consistent performance?”

The same applies to the traders – profits in one year do not guarantee profits in another year. Even they fall victims to market activities and randomness. The moment traders find they are in a loss or have received warnings, they get the signal – either they switch jobs to other investment firms or change the stream (like my friend did). Overall, the common man sees only profits of the firm as a whole, primarily coming from brokerage commission or advisory services on M&A deals or similar transactions.

Then how about the people who are trading for their own living or traders who are consistently making money and are employed within the same firm for years? They have to trade within a very tight profit margin – say just 0.1% to 1% levels. Then how do they make money? They have to trade very frequently, sometimes buy and sell within a minute! They trade with big capital and multiple times. Huge trading volume ensures lower brokerage charges, and multiple profit opportunites (along with the limited losses). These people are experienced and educated enough to know what they are doing, how they have to do it and what implications their trading actions will have.

What’s in it for individuals like us – basically, NOTHING! The reason I mentioned all these details above is to give you a picture of the trading world. We individuals, employed as salaried professionals or running our own business/shops, cannot keep up our trading activities like the professional traders – nor do we have the knowledge, capital and professional experience to control our losses and make smaller profits multiple times. When we trade, we are pitted against these professionals, who are making the markets. We all fall victims to the market trading activities – majority of the times making losses in intra day trades.

It’s a highly efficient market; acting upon news is nothing more than fooling ourselves. Either stick to your actual job/profession and be sincere to it or become a fulltime trader – Nothing in between will work as far as the trading activities are concerned.

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28 Comments: Post your Comments

A said...(on 13 June 2007 at 04:07 )  

Great article Sir.. I sincerely appreciate all those efforts you are taking in typing out all your experiences with the stock market.. I am a regular MF investor, and I must say, your blog has stirred me up. I shall henceforth be much more careful the next time I write that subscription cheque for some MF scheme.. I request you to kindly include my mail id (ajedaa@gmail.com) in your mailing list. Thanks once again for posting these wonderful eye-opening blogs which are benefiting we the middle class investors. Regards, Ajeda

Anonymous said...(on 13 June 2007 at 08:49 )  

useful article... explained in simple terms...and examples

Jayakumar Balasubramanian said...(on 14 June 2007 at 02:48 )  

Are Seth, Great to see the blogging fever caught you big time. I just saw it and it looks really cool. Will read them and write my comments as well.

- Jayakumar

Saravanan said...(on 14 June 2007 at 21:04 )  

Hi Shobhit,

I am very happy that at least someone is there to help individuals like me who is into the market and helplessly wandering here and there. I along with my friends got into stock market in the hope of making money but the truth is we are in losing side.. As a human being its very common to make mistakes I wish to rectify them, please help me. After reading your blog I have realized that there is nothing called investing in stock market its more or less trading.

I wish to put a link to your blog from my blog. Will that be fine with you? I wish more and more people like me get educated about stock market and other concepts which you have explained.

Please revert back.

Thank you,
Saravanan

shashi said...(on 14 June 2007 at 21:15 )  

We are looking forward to your advise on investment and trading.
Could you please come out and invite healthy discussions and criticism. We have read your articles with interest and are waiting for the main article.Thanks

ihkris said...(on 14 June 2007 at 21:28 )  

Hi Shobith,
what you said is revealing the hidden truth by thinking as a contrarian.Fine that scars a few,enlights a few and makes crazy a few.

But one thing i can say.None of the readers should leave either quities or mutual funds just by seeing ur articles.

Let me tell you one thing.Indian Stock market,MF market are still in infancy and there is lot of place for growth.

Equity is the only option that has the potential to beat inflation over a period of time. Therefore, by following a disciplined approach of investing regularly into the stock market we can benefit from it.

You please dont make people get scarred and leave the articles half cooked.

Please tell the complete picture like how we should be in MF and equities how to plan etc.

If you dont give complete picture trust me readers will leave either your blog or equities for sure.

So pls give readers complete picture saying if your age us X this is the way you have to go etc.

Regards
Harikrishna

Vishal Raina said...(on 15 June 2007 at 00:14 )  

I've been following up with the financeial markets and regularly reading these blogs written by Shobhit. THEY ARE EXCELLENT. However, I'm not able to understand the behaviour of the audience. I've seen so much eagerness among the visitors - just cant understand what they expect!
One thing that I've liked about Shobhit is that he has only responded to the comments that are critical about his blog. Usually bloggers respond to comments that praise them.

As far as I understand, majority of the people are not able to get the right point. Shobhit is repeatedly saying that "No one can make exceptional returns from the market" - still majority of the readers, despite reading the articles, are asking for investment strategies. Ms. Shashi is repeatedly asking for efficient investment strategies, while Harikrishna is insisting on investmetn plans quoting reasons for half-cooked articles. Shashi also added "please come out and invite healthy discussions and criticism" - Comments section is always open for discussion and criticism, why are you only keen on asking investment plans? This again shows the eagerness with which individuals are ready to play around with their money.

I'm sure shobhit must be having some plans to introduce these investment plans in an organised way. I'm not trying to undermine Shobhit, but the fact is how many of us know him - and why are majority of us so keen on asking and then following his investment plans?? All of you may have invested in MFs, do you even know the name of the fund manager? I think this is truth that is exposed - people ready to jump in the well with there money, and MF Managers and agents take very good advantage of this eagerness.

It's good to know the system first, rather than using it. Take time to read each article thoroughly - go through the comments on each. Visitors are increasing and so are the comments on each article (previous ones included). Read them, discuss openly and then let shobhit explain his fundas.

shashi said...(on 15 June 2007 at 08:51 )  

Mr.Vishal Raina did not get it right.
Just open the intro of the blog and then you will appreciate what exactly was meant by efficient investment strategies.
When you play football and you have no idea of where the goal is you would never know which way to kick and kicking left or right at random would never reach the goal.
Mr. Sobhit has started a blog which is of serious nature and not just timepass.
Kudos to him.
All the same he also knows what the readers are looking forward to.
As to knowing Mr. Sobhit;scroll through the blog page carefully from first page and you can know about him.
Yes, we are eager to learn/understand what are Mr.Sobhit's teachings/guidelines on investment strategies and no one jumps into a well with hardearned money.
I am sorry Sobhit that I wrote all this on your blog.
Please carry on with your good work.
Thanks.

Philip said...(on 17 June 2007 at 19:53 )  

You cant say that unless i master something, i will never get into that. Going by your saying, we should never be doing the job that we are doing today.

No one is perfect and if you are expecting people to drop everything before trying their luck in the market, i believe that's the most foolish advise to give anyone.

Its not like a total black or white scenario. There is always a grey scenario too and you can always take that path.

I have a regular IT job and as an aside i do invest heavily in the market thru mutual funds and direct equity. Havent made any losses in the past 3 years and even if do some, i dont think i will regret my decision. My job also entails me to make mistakes. Does that mean that iam going to resign my job and sit at home?

Your articles are nothing but scaremongering stuff. The 600% increase in the sensex is stupid to aim for. The Sensex is only made up of 30 stocks and if you are going to measure yourself against that, there is nothing more stupid than that.

Somewhere you even wrote that once the slowdown in the IT market happens in the USA, the sheen will be over for the Indian IT market and that the market will crash and that will be the end of the India story.

I believe only morons believe that 1 million IT professionals are powering the 9% growth of India today. What about the other sectors? Telecom, retail, manufacturing, real estate etc. You mean they are doing nothing?

Kya to bhi timepass likhta hai re tu? Anyway just completing an MBA doesnt make anyone an authority in the markets.

Cheers. Keep writing.

Vishal said...(on 17 June 2007 at 23:01 )  

Shashi and Philip:

Shashi, I am one of the fans of Mr. Shobhit and I did indeed read the intro about him and the intro to the blog. I agree with you that this blog of Shobhit is not just timepass. But I could not find anywhere he mentioning that he will guarantee an efficient investment strategy. It's only you who is asking for it. Read Shobhit's response to one of the comments left by Pawan. There, he clearly tells that his focus is not on returns, but on the risk and transaction costs. And whetehr it it worth paying the cost and taking the risk. That's what I mentioned in my previous comment , read comments on each articles, as new people are continously coming and leaving comments on each article.

Philip, I have a request for you - atleast show some concern and respect for a person who is putting in efforts to write his experience and attempting to expose the dangers of investments. Qualification and experience should be given a atleast some respect. Your comments like "Kya to bhi timepass likhta hai re tu?" doesn't undermine Mr. Shobhit, but indicates your level and background where you come from. People like you dont deserve any respect. Criticism should be constructive, rather than being disrepectful. You are not obliged to read these blogs. If you dont have the minimum level of decency, get lost!
Also, coming to the your "NOT making losses in last 3 years": Shobhit has righlty mentioned in one of his articles-"when Market goes up, everyone and their aunts will make money. Trouble is when the market goes down, then people loose their shirts and their pants too." Learn to benefit from the concepts being presented here. You will get millions of agents talking only about the benefits of stock market, but there will be only 1 or 2 Shobhits exposing the truth.

Vidisha Apte said...(on 17 June 2007 at 23:55 )  

I completely agree with Vishal.
Philip should not show any arrogance. Instead, we all should thank Shobhit for such wonderful "against the stream" and truth revealing articles.

Anonymous said...(on 18 June 2007 at 06:36 )  

really nice article,thanx a ton 4 sharing ur views,,,can u pls update on ur articles at shweta_ms2@yahoo.co.in....thanx...and do keep up the good work

shashi said...(on 18 June 2007 at 08:12 )  

Mr vishal is requested to read the last lines of the very first article:
In next few articles, I’ll be talking about making efficient investments, so as to maximize profit and minimize risk/losses.
Thanks.

shashi said...(on 18 June 2007 at 08:17 )  

Mr.Vishal
Please look before you leap.
Hope you got the message right.

Philip said...(on 18 June 2007 at 17:25 )  

Hey Shobit, am sorry about my comments. Even though I dont agree with some of ur points, i agree i have no right to be nasty while disagreeing.

I dunno why i wrote like that. Maybe i went off my rocker for a while ;)

Pls accept my unconditional apologies.

Cheers

Investment n Trading Advisor said...(on 20 June 2007 at 22:23 )  

Philip,

It's true that your job entitles you to make mistakes. But are you alone working on your task? You mention that you belong to the IT industry. When you develop something, you Unit test it. After that it goes for System testing by testing team, following which it goes for integration testing, User acceptance testing and then it is finally rolled out. Even after that, if there are any problems, it constitutes a SHOW STOPPER bug, and then ppl are made to work day and night, while a work around is suggested in the meantime. So, you have the liberty of making mistakes in your job, because you are backed up by so many different people and teams.
Investments and trading is not that way. YOU have to take decisions individually, and most important, you discover the mistakes only after you make a loss. That time, there is no one offering help to compensate for your losses.

Mahen said...(on 22 June 2007 at 05:23 )  

A very good and well presented article.
I have been tracking websites like moneycontrol.com, money.rediff.com, economictimes.com sharekhan.com and a few random sites to which i go through the links on each of the above websites. Most of the time i was looking for tips on which share to buy and which one to sell. Not to do actual buying and selling but to understand the reason and pattern behind the recommendation.

I suggest Philip, Vishal and others who i am sure are tracking these websites and news channels to observe a very important thing. All the experts will give a "Buy (or hold) xyz share" when ever the market is going up substantially. And experts will say "Sell (or exit) abc share" when the market is going down. And to top it all within a matter of 1 hour 3 different experts will give, Buy, Hold or Sell advice on the same share.I have been observing this since 5 months now.

If you do follow their advice its likely that u wont make much gain (or loss) because the information due to which they wanted us to act in a particular manner would have already been factored in the stock price of the company within half an hour of the news coming out.

Examples of news which affected share price and led to experts giving a particular advice: Tata Steel buying corus, hindalco buying an American company, Adlabs being bought by ADAG (majority stake), Deccan aviation selling majority stake to kingfisher, RBI policies leading to hammering of auto stocks, Zee entertainment goes up on withdrawing from telecasting of indian cricket matches, Infy, wipro, Mindtree, TCS losing heavily since march due to dollar weakness and latest the going up of Reliance energy and going down of Reliance Industries share price due to the High court ruling.

I wonder how many retail investors acted on any of these news and made money out of it. So accept the fact that we retail people are a very very small part of the huge "Dallal street"

Anonymous said...(on 15 July 2007 at 07:31 )  

Hi Shobhit,

Pls send me your articles to Praveen77in@yahoo.com.

Thx
Praveen

Madhu Sudhan said...(on 16 July 2007 at 01:10 )  

Pls send me your articles to jmadhu@gmail.com

prabhu said...(on 17 July 2007 at 00:02 )  

Highly Appreciable!!! All Facts, NO fallacy. I'm glad to receive substancial knowledge thorough your atricles...One might have to accept "Either stick to your actual job/profession and be sincere to it or become a fulltime trader – Nothing in between will work as far as the trading activities are concerned"
Cheers!!! PLN

Anonymous said...(on 6 August 2007 at 21:05 )  

with so much wisdom how can you loose money in the market

Anonymous said...(on 6 August 2007 at 21:23 )  

Hi Shobit,

How to buy these ETF's, can we buy NiftyBee etc through ICICIDIRECT..throw some light on this..

Thanks
Senthil

Investment n Trading Advisor said...(on 6 August 2007 at 23:36 )  

Senthil

You can buy ETFs through ICICIDirect.
The stock codde is "NIFBEE" and for Nifty Junior is "NIFJUN".

-Shobhit

Rama said...(on 9 August 2007 at 09:15 )  

Shobhit

Nice article, But then in which profession cheating is not there.
One mans profit is another mans loss. Thats how the way of the world is since time immemorial.

Trading in stocks one should not become too greedy and should be able to calculate the risks vs returns and then decide.
Like you said Market is made of so many indviduals/organizations. A 600% rise in the markets will not cause everyone to have 600% profits.
The money generated is distributed based on the amount you invested. How can I invest 1L and expect to get back 6L if the market is rising at that rate.
In the same vein if I invest 1L and get back about 1.5L in 3 years which no bonds/fds/tax savings schemes give me then what is wrong with investing in stocks as long as I have the stomach for bearing short term losses.

Tanady said...(on 11 August 2007 at 21:31 )  

Hello,

Your blog are really well organized and full of information. Thank you for sharing... (smile)

My name is Cornel Tanady, and have been doing some research about options trading.

Kindly visit my blog to know more about options trading and leave some comments please.

Thank you very much.

Sincerely,
Tanady

Anonymous said...(on 13 September 2007 at 01:24 )  

Hi Shobit,

Thanks.

Senthil...

Anonymous said...(on 9 October 2008 at 13:44 )  

Ah yes, wonderful! Now we see what can happen when Wall St gets very greedy. Years of gains now erased, but CEOs, Brokers, and others are laughing all the way to the bank. I don't invest any longer in the stock market. Let them take someone else's money.

Keith

Being Different! said...(on 17 November 2010 at 11:37 )  

Please mark a copy to my email ID for any new article being published...! kar.bibhuti@gmail.com

Wish you all happy and fruitful trading and investing activities with safety! = = = Post a Comment

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