Myth about low (Zero) brokerage

Is the low (Zero) brokerage a sure-shot way to earn in the trading?

When it comes to making a profit in business, if we reduce the costs we can make more profit. But is it true for trading in the stock market? Is low (or Zero) brokerage a guarantee to make sure-shot profit?

On the contrary, number of experts believes that the lower brokerage is one of the major reasons for the losses of traders. Here is why they believe so:

• Lower (zero) brokerage induces us to trade more: When we know, we have lower brokerage and hence lower costing; we are tempted to trade more frequently by believing that we can make profit even in the smaller movement of the price. Hence, we start focusing on all the smaller movements of the price. When we start attending to such a micro movements, we get exposed to all the emotional roller coasters of the price volatility because we are required to react to all the price-movements. i.e. with each of the price movements we get either euphoric or panic. By design, our mind is incapable of handling such frequent and extreme emotions of greed and fear and that leads us to commit the trading errors of either booking profit too quickly or keep moving our stop-loss further and further. Thus, the traders who are incapable of handling their emotions and unable to follow the trading disciplines, would be the big losers because of frequent trading induced by lower brokerage.
• Lower Brokerage does not mean lower costing: Per say, the lower brokerage gives us the feeling that we are paying less. However, the fact is, when we have lower brokerage, we always want to trade more. With each trade we pay the transaction charges, the taxes and also incur slippages (the jobbing difference). Hence, we might have saved brokerage charges per trade, but we end-up paying higher amount of brokerage and when we calculate the other charges, it is certainly a losing proposition.
• Do all the traders who pay higher brokerage, make profits? If we say low brokerage is not a sure-shot way to earn; then the question is, “Do all the traders who pay higher brokerage, make profits?” No, certainly no. Even the traders paying higher brokerage may not make money. However, the observation is, the traders paying lower brokerage lose faster. (e.g. if high paying traders wipe-off their capital in say one year, the low paying traders would lose the same amount in less than six months). The high paying traders survives a bit longer in the game. And because they are there on the pitch for longer time, they may get chance to have some favourable trades wherein they might make some money. Also, because they are not attending to the smaller movements in prices they are less likely to have knee-jerk reactions which cause the trading error. They have more time to allow the logical mind to work before the psychological mind reacts. Hence, there are higher chances for high paying traders to survive than the ones paying lower charges.
• Remember one thing, the broker who is offering lower (Zero) brokerage is not doing it for your benefit but he is designing such schemes for his benefit. With lower brokerage his intention is to tempt the traders to trade more and thereby make more money for himself. We are not saying lower brokerage is bad, but what we need is; lower brokerage along with some mechanism to maintain the discipline and control over the emotions. This could be a winning combination.

Is the market Logical or Psychological?

Is the market Logical or Psychological?

The ever confusing question for the traders is, “should we analyze the market logically or psychologically? Few traders would understand that our trading result is greatly affected by our emotions. The emotional roller coasters generated due to market volatility is often responsible for behavioral mistakes of the traders. In this regard, there is an interesting article by Joachim Klement. Joachim Klement, CFA is a trustee of the CFA Institute Research Foundation. The excerpts:

Investing isn’t hectic, it is calm and measured.

Today you can check the value of your investments on a minute-by-minute basis if you want. But just because you can doesn’t mean you should. 

It is hard for investment professionals to just sit there and do nothing. Resisting that urge to adjust your portfolio becomes particularly difficult when you’re faced with losses. Loss aversion means you suffer losses more than you enjoy gains. And what’s still the best way to avoid losses? Don’t look at your portfolio.

Assume an equity portfolio with a 10% annual return and volatility of 15%. The probability of a positive return over any given year is 93%. As a result, an investor who evaluates the portfolio once a year will experience a loss once every 10 years or so. If the same portfolio is evaluated quarterly, a loss will occur about once every four quarters, or once a year. And if that portfolio is evaluated daily, roughly 120 days a year will register losses.

It takes superhuman discipline not to change a portfolio when you are confronted with losses 120 times a year. But the best returns in the long run are achieved by adhering to a well-diversified investment strategy that lets you reap the benefits of the different risk premia available to long-term investors.

To stay calm and measured, you need to turn off your Bloomberg screen, close your Excel spreadsheets, look at your performance only sporadically, and avoid the temptation to tinker too often with your portfolio.

Investing isn’t rational, it is emotional.

The financial industry is incredibly innovative — mostly when it comes to reinventing the wheel. Thanks to all of these inventions like limited liability company, the stock exchange, diversification, the mutual fund, the index fund, options, or futures, investing has become cheaper, risk management more effective, markets more liquid, and access to investments more open. Ultimately, financial markets are among the most democratic institutions in the world today.

But very often financial innovation is a recipe for disaster. Investing may be rational, but money is emotional, and when risks — or opportunities — materialize, emotions take over and investors make crucial mistakes.

I have made it a rule to recommend only those investments that I have experienced myself. If a new innovation comes along, I tend to add it to my own portfolio with a little bit of money just to know what it’s like to live with it. Experiencing a new innovation firsthand will elicit the same emotions in me as it will in my clients. And only then can I judge if the investment is appropriate for a specific investor. Emotions cannot be imagined. As a portfolio manager or adviser, you have to experience them to improve your recommendations and decisions. Research shows that fund managers who invest much of their personal wealth in their mutual funds generally outperform. 

 Market-  Hub Stock Broking Pvt. Ltd., based on our personal experience, we firmly believe that most of the clients are either unaware or are unwilling to accept the importance of emotions in trading.  As a leading broker in Surat we have always made it a point to understand the errors incurred by the traders and investors and offer them a solution that can handle such errors. It is because of such initiatives by us that today, we are among the most reliable stock brokers in Surat.