This is a fundamental question in any common man's mind. More importantly many young, budding investors have this doubt. In the recent past, when the India stock market fell down (all the way down to 8000 points in BSE from around 21K) many long term investors suffered losses. On the other hand, when the market went back up (from 8000 points to 16K range), many investors enjoyed huge profits – even to the tune of 200% return. So, what do we really infer from these… To invest or not to invest?
OK, before we jump to answer this question, let us see what makes the share value of a company moving. The share price can go up due to 2 different reasons:
The first reason is obvious and any sane person can comprehend the logic. The second reason tells us a company's share price can go up – even if the company is NOT really growing. Hmmm… How is it possible? Simple – it is purely due to demand Vs supply equation. When the whole market is going up, the investors' mood is upswing and everybody tends to buy. So, there are more buyers who are ready to buy the shares, while only few people want to sell. This results in increased demand (for the shares) compared to the supply. And due to this demand/supply imbalance the stock price moves up.
The binary world…
There are some investors who want to make profits in short term. The short term here means few weeks, few days or even few hours in a day. Those people tend to take advantage of the scenario created by the demand/supply imbalance. You and I can also do the same – in theory. It requires lot of time to be devoted and lot of money to back you up (ready to face losses, in the worst case scenario).
Other set of investors - who pick few selected top performing companies and stay invested for longer period (even years!). These people rely more on the company fundamentals and are not easily influenced (rather confused) by the short term volatility of the markets.
The bottom line
Now that, you know all these – I am sure you can make up your mind on where do you want to belong – based on your objectives: either short term profits or long term gains.
But, beware – whatever strategy you follow, the market movements (the reason 2) will still have an impact on your money.
Coming to the original question we started with: The market is not a stable place as we all know. Hence there is no ‘safety' guaranteed to anyone. But this does not stop us from taking ‘risks'. As the usual saying goes “the reward matches the risks" in the market place. So, do not focus too much on the safety element; and instead take calculated risks. Be brave and successful. All the best!