The Hindu Business Line : <I>The bread and butter of stocks </I>

Consider this. A speaker in a financial-strategies workshop contended that investing in a stock was the same as buying groceries. You typically buy groceries during a bargain sale. Her argument was that you should buy stocks the same way — after they have declined considerably. This argument is not entirely correct. Why?

Groceries and stocks

The difference between groceries and stocks is the intention behind the purchase. You buy milk and bread for your daily consumption. You are concerned about taste and getting value for money, not what others think about your purchase.

It is not the same with stocks. You buy stocks not to keep them for life but to sell them at a higher price at a later date.

Suppose you buy a stock after it declines from Rs 50 to Rs 40. You would profit from the "bargain buy" only if there is demand for the stock above Rs 40. And that demand depends on people's perception of the stock's value, not just your opinion on whether it is cheap.

Bargain buys

You may buy the stock based on your opinion. If you are wrong, you will be stuck with a "bargain buy" for a long time. Some professional money managers do engage in "bargain buys". But in this strategy called the value-style, the money manager buys a stock only if she believes that there will be demand at a higher price.

Technical analysts are not concerned about bargain buys. Their objective may be to buy a stock at a high price and sell even higher. It does not matter if you believe in fundamental or technical analysis. People's perception of value is important in the market. And that makes buying stocks different from buying groceries.

(The author is based in Surrey, BC, Canada.)

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