25 December 2012

Never Use Limited Capital to Exchange Unlimited High Risk Return in Stock Market Investment

The risk of stock market investment

The risk of stock market investment is proportional to the ignorance of an investor. If an investor have little or no idea what kind of business/company has been bought, then the risk of this kind of investment is extremely high. It is worthy to highlight that even both investor A and investor B have bought the shares of the same company, their investment risk levels are still different. If investor A have done sufficient homework and expect that there is a reasonable return for the investment for next 2 years, he or she will have a strong commitment and patience to wait for the expected fruit. Investor B, on the other hand, who simply followed the decision of the investor A, does not have such discipline and determination to wait for that expected fruit. As a result, investor B will always sell the potential good investment during the so-called negative atmosphere.

Limited Capital

As a creature who normally survives less than 10 decade, we have very limited time to earn unlimited money. It turns out we normally have limited saving. When this saving is used for investment, we call them as capital.  This hard earned capital is very precious because it was exchanged by our limited time and energy previously. Therefore, we should always try our best to 'protect' them from the 'invasion' by inflation.

Unlimited high risk return

Stock market often be treated as online Casino by many people. Every working day, 'investors' try to guess the trend of a particular 'share' then try again to make 'correct guessing' that could eventually earn fast money from their limited capital. Sometimes it is matched, but sometimes it is not matched. Why? Simply because the tools used for 'prediction' is not advance enough? or simply because lacking of luck?

Winner or Loser: 45:55 Game

Assuming there is 5% transaction charge, trying to make a correct trend prediction is a 45:55 game, that is 45% (50% - 5%) win and (50% + 5%) 55% lose, for everyone. For a trading company, it is a 100% win game. This is because no matter the prediction decision is correct or wrong, you still need to pay the transaction fee. The more the merrier (for trading companies only).

As you can see or even experience it previously, the chance of a correct prediction is 45% only. It is considered a high risk deal (a.k.a gambling deal). To make a right prediction is not a big deal in short term. Because, in the long term, there is only one winner in the 45:55 game, that is, stock trading company. Therefore, Please never risk your limited capital for such game in stock market.

Written by: Xaivier Chia

(P/S: The above sharing is solely based on personal insight. Please do not take it seriously. However, your valuable feedbacks are very welcome.


1 comment:

Stock tips said...

This post is so informative and makes a very nice image on the topic in my mind. It is the first time I visit your blog, but I was extremely impressed. Keep posting as I am gonna come to read it everyday!

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