Parag Parikh

How does one define investment? It is preservation of capital. A reasonable rate of return is assured. It is done from one's own funds. If done out of borrowed funds it is termed as speculation.

Thus even if one buys a bond from borrowed money it is termed as speculation. Investment is all about buying a good business and having the patience to see it grow and flourish over a period of time.

How many of us are genuine investors going by the above definition? Not many. It is interesting to observe how our environment comprising of the banking system, the financial intermediaries, the stock exchanges, the regulators and the government is promoting brute speculation in the guise of investment.

It is more out of lack of understanding and knowledge of what investment is all about. These days, one comes across various bank advertisements promising advances against shares so that one could buy more shares or trade in shares on margins or invest in initial public offers.

But one must understand that borrowing money to buy shares is not investing.

Last year we saw the advent of the derivatives. This would herald a new chapter in the history of the stock markets claimed the various authorities.

People could now trade on the stock markets without taking delivery of shares by paying a small margin. But how many know that derivatives are hedging instruments? If used thus they have great utility. But if they are used as speculating instruments they could be very dangerous.

And predictably, this is what is happening. Various irresponsible media and TV channels are doing their best to promote this speculative culture.

Stock exchanges are competing to increase their turnover in the derivatives market. Result: We have created a society where speculation is encouraged.

Another factor which has encouraged speculation is technology. Wondering how? Well, technology has brought down transaction costs. Fierce competition in the online trading segment has brought down the transaction costs to 2 to 5 paise.

When cost of transaction goes to such low levels it obviously lures people to speculate more and more. But then, there are no short cuts to making money. It takes time and patience.

Most investors have forgotten how to be patient and there is a mad rush to make quick money leading to very short-term approach to investments.

Take the case of open-ended mutual funds. They talk about long-term investment strategies but at the same time allow their investors to exit at 24-hour notice. How can one follow a long-term investment strategy when the money it has is prone to short-term behavior?

This ultimately encourages the fund managers to punt in the markets rather than look at a long-term investment strategy.

A stock fluctuates 20 per cent a day. Does this mean that the fortunes of the company have changed? It only signifies that the punters are at work. Is it right for us to call this the Stock Market or should we call it a Gambling Den? Are we "Investing" or "Speculating"? Is "Investor" the right terminology to use for the average person in the so-called stock market?

The answer to a major extent lies in being patient, diligent and informed. And the most important part of all is to keep greed at bay when dealing in stocks.

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