- Date : 01/04/2019
- Read: 7 mins
This April Fools’ Day; be an April fool but not a financial fool
A new financial year holds tremendous promise as you would be reviewing your financial goals and deciding about the next steps to take. However, it could also bring “Fools Gold”. “Fools Gold” literally means iron sulfide which resembles gold to the untrained eye but isn’t worth much. It is also a metaphor for something that seems disguised as a valuable opportunity but may end up being a waste of time, money and effort. This April, we present how to avoid getting fooled by the lure of different types of “Fool’s Gold”:
Penny stocks may suck all your hard-earned pennies
At present, it is estimated that around 5,000 stocks are listed in BSE and about 2,000 in NSE. It is believed that less than half are actively-traded and the rest are illiquid stocks. Over the last few years, the participation of retail investors in equities has gone up. This is evident from the huge domestic inflows into equity funds which ranges between Rs 10,000 crore and Rs 12,000 crore per month. Indians are also warming up to investing directly in equities.
However, the temptation to discover the next multibagger which can turn an investment of few thousands into a corpus of several lakhs ends up trapping many inexperienced investors. One ends up receiving unsolicited phone calls or emails or messages which informs about the next multibagger stock. These days, one also ends up getting added into Whatsapp Groups which promise free recommendations.
But one needs to be skeptical about such recommendations. These tend to be pump and dump tactics used by unscrupulous promoters and unethical brokers who drive the share price of a comparatively illiquid stock and then offload it on unsuspecting retail traders by sending such recommendations. Most of these stocks tend to be penny stocks which cost a few rupees or even paisa. For instance, imagine a stock ABC which costs Rs 2 per share. One may get an alert stating that it can go up to Rs 12 in a matter of one month. One may feel that one can own at least 10,000 shares of this stock by investing Rs 20,000. Instead of going up to Rs 12 per share, this stock might would most likely fall to Rs 1 per share.
Now for a retail investor it is important to understand that the fall from Rs 2 to Rs 1 is a loss of 50%. But to regain one’s capital, the stock price has to rise by 100%, i.e. from Rs 1 to 2.
There is no harm in researching and entering penny stocks, but one must do exhaustive research before considering doing the same.
Don’t be a fool, play it cool tip: Invest through SIPs in mutual funds and buy shares of fundamentally strong stocks whenever prices fall.
Burst the bubble
Bubbles feast on the two primal traits of a human being – fear and greed.
Remember how bitcoins used to be the flavour of the season before witnessing a tremendous fall? There is always the next big thing. It may an upcoming locality or a form of cryptocurrency or a business idea. The Fear Of Missing Out (FOMO) is a crucial social anxiety that could cause novices to enter at the time when the bubble is at its peak. One may be subjected to promotional messages about a particular opportunity being the next and possibly the last big thing. However, it is best to avoid these bubbles. In case you do end up participating in what is turning out to be a bubble, it is best not to be greedy and exit your positions as soon as there is a profit.
But don’t feel miserable if you did lose your money in a bubble. Even Sir Isaac Newton had lost around £20,000 which would be worth more than $ 3 million today when he got tempted by the skyrocketing stock price of the South Sea Company.
Don’t be a fool, play it cool tip: Wait it out. Don’t break your deposits or investments to ride the next big wave. The investments which you make regularly will offer you handsome and stress-free returns over a period of time.
For your eyes only
Remember that credit or debit card numbers, OTP and online banking credentials shouldn’t be shared with anyone unless one is heavily reliant on a trusted individual to handle financial matters.
Now a days, scammers may have your credit card detail and would call you to only verify the OTP. However, it is important to note that even your own bank would ask you to not share OTP details with its customer care team.
Don’t be a fool, play it cool tip: There is no option but to educate yourself about how to transact online and over the phone. Remember to keep scanned copies of your cards and details of login credentials in a safe place – preferably an external hard disk. You can even upload these in a robust cloud platform like Google Drive.
Don’t fall for Ponzi Schemes
The lure of getting higher returns on one’s investment might influence one to invest in Ponzi schemes. A Ponzi scheme is a fraudulent scam which generates returns for older investors by acquiring investment from new ones. There comes a time when the scammer is unable to pay off the older investors and then the entire set up falls like a pack of cards.
Don’t be a fool, play it cool tip: Remember that investing steadily and diversifying one’s portfolio is the key to creating long term wealth. One can identify Ponzi schemes by their lack of credibility and unbelievable claims. It is better to not touch these schemes with even a barge pole.
Beware of Quacks
Even educated professionals end up falling prey to superstitions and take the help of quacks to resolve problems related to bad health. Most likely, these quacks are recommended by people known to you. Although there are legislations, such as the Anti-Superstition and Black Magic Act which considers acts of black magic, magic remedies etc practiced in the State of Maharashtra to be acts of criminal offense, quacks are present all across India.
Don’t be a fool, play it cool tip: To ensure that your family members and you can be treated in the best of hospitals, purchase a health insurance plan with adequate coverage. Secure the financial future of your family by purchasing term insurance.
Avoid Multi-Level Marketing (MLM) Schemes
Most people who are keen on starting a venture end up falling prey to MLM schemes. There are robust businesses which have grown substantially inspite of running a MLM model, but if you come across a MLM business model that seems to be offering a product or service which seems too good to be true, it is most likely to be a spectacular failure. The tragedy of MLM schemes is that it even ends up spoiling interpersonal relationships.
Don’t be a fool, play it cool tip: Starting and running a credible business venture takes good old hard work. To fulfill one’s business dreams, one must start saving up to arrange for the initial capital. One can begin by investing in an equity mutual fund for a few years and redeem it when the goal is achieved.
To avoid getting fooled altogether, it is best to engage with a qualified financial planner who can offer unbiased financial advice on how to craft one’s investment journey. Creating wealth through legal means takes time and cannot be achieved with quick fixes.