How do students play the stock market?

Students who couldn’t resist the call of the stock market tell us why they took the plunge and how they go about trading

Headlines about the stock markets hitting all-time highs and share prices giving multi-fold returns are catching the eye everyday. Indeed, they are tempting even those who stay away from the market to try their hand at investing to get good returns.

Students are no exception. We spoke to a few students who play the markets to find out what pulled them into it and how they juggle markets and academics.

The trigger

What has attracted these students to step into stock markets? The reasons differ. Some get influenced by their parents who invest in markets and some by friends. Dinesh Kumaran, an engineering student from Chennai, says “my father, a bank manager, is an active trader. With his guidance I started investing in the markets.” Students like Abarajithan and Dhanuprakash got inspired by their friends who invest in stocks. Abarajithan is an engineering student from Udumalaipet and Dhanuprakash, a swing trader from Tirupur. But the case is a little different with Viveknath Sivaraj, a management student from Tiruchi. “My professors discuss regularly, in class, share price movements and the profits they make. This attracted me towards the stock markets and I started watching the price movements regularly,” says Viveknath.

Information source

In the digital world, the internet is the basic source for students seeking information for both learning and investing. A common source preferred as a starting point to learn is YouTube. “It is a good place to learn the basics of stock markets and investing,” says Abarajithan.

For getting news and other information about companies, invariably everyone uses moneycontrol.com. Dinesh taps the Bombay Stock Exchange and National Stock Exchange mobile applications. “I use the BSE mobile app actively for regular news and information about companies. It is handy for me use it on-the-go.”

Talking to these students reveals that they are stuck with few sources either for obtaining information or for learning. We do not deny that the sources they are using currently like Moneycontrol.com, youtube etc are good. But there are more options available for them to explore. For a beginner, Investopedia (www.investopedia.com) is a very good place to start. You even get one financial term explained everyday if you subscribe to their “Term of the day” service. Though the examples in this website pertain to US markets, for understanding the basics this is a good source to look up.

When it comes to domestic markets, reading leading business newspapers is a must. Apart from that, Yahoo finance (www.in.finance.yahoo.com), Google finance (www.finance.google.com) are good sources for getting news and other company related information.

If you want to see the historical price charts and do your own analysis, then investing.com and TradingView (in.tradingview.com) are good choices.

To gain theoretical knowledge on company valuations, etc., one can follow Ashwath Damodaran, Professor of Finance at the Stern School of Business at New York University. His webpage http://pages.stern.nyu.edu/~adamodar/ has links to all his videos.

Certification courses are also offered by the BSE, NSE and NiSM (National Institute of Securities Markets). The study materials of these courses are also a good source to understand the basics of the financial market.

Source of money

How do these youngsters who are students and not salary earners generate the capital to invest or trade? Vivek and Dhanuprakash get money from their parents whenever they want to buy stocks. Abarajithan also depends on his parents but with a difference. “I save the pocket money my parents give me for my expenses. I use this to buy shares,” says Abarajithan.

But Dinesh follows another strategy. He earns while studying and routes the earned money into the stock market. “I am a web developer and I earn from the clicks that I get for the websites I develop. I invest my earnings in the stock market.”

The strategy

How do they choose the stock of their choice? Dhanuprakash picks stocks based on the price movement. “I pick stocks with volatile price movement. I buy and hold them for a few days and exit the trade if I get about 5 per cent return,” says Dhanuprakash. Vivek picks stocks from the recommendations given by his broker. “I do my own study and analysis on the stocks recommended by my broker and invest in it if I am convinced,”says Vivek.

This stock picking strategy followed by Vivek, that is, doing his own analysis instead of blindly following the broker’s recommendations, is good. Newcomers into the market should adopt this strategy because sometimes brokers are prone to recommend shares as per their personal interest.

Do’s and Don’t’s

Stepping into the stock markets at an early age is good. But if you have been pulled into the markets by the profits made by others, then be cautious. Do not get carried away by others’ success stories. Avoid stock recommendations that come through mobile phone or other sources claiming that you will get 300-400 per cent return.

Markets do not give you profits all the time. Losses are also possible and if you fail to act at the right time thinking that the market will recover you could go terribly wrong at times. Ignoring the trades or investments that led to losses can wipe out the entire money you have earned from and invested in the markets.

So, following the concept of stop-loss is a must, especially for traders. Cutting short the losses should be the first priority for traders. Dhanuprakash has a profit target of 5 per cent with a stop-loss of 4 per cent for the positions he takes. While keeping the stop-loss is good and a must for trading, his risk-reward ratio is not preferable. In his case, any profit made in one trade will be wiped out by a loss in another. So, it is advisable to keep the risk-reward ratio as 1:2. That is, if you are aiming for a 5 per cent return, then your loss limit should not be more than 2.5 per cent. Also, whenever the trades go in your favour, develop the habit of locking some profits by revising the stop-loss.

For students, the capital employed for investing or trading is very small since they take money from their parents. A small capital will exert a psychological attraction towards stocks that are priced lower. Avoid getting into very low-priced stocks and penny stocks because you may not be able to sell later due to poor liquidity. For students this is just a learning stage. With the little capital you have, even if you are able to buy shares in small quantities, be it even less than 10, buy them and learn from the investment.

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