Here’s what millennials can do to make money from equity market

When the stock market was touching new highs in January 2018, Mumbai-based Vivek Mistry, 24, got tempted to invest in equities after completing his commerce graduation in 2017. He was keen to learn about investing in equities through experience.

But he didn’t have money to invest in equities. So, in March 2018 he borrowed Rs 1 lakh from his parents and invested in equity markets. That wasn’t his only mistake.

He decided to dabble in derivatives; he bought future contracts of some state-owned banks. But dismal state of state-owned banks (the news of the Punjab National Bank fraud perpetrated by now-fugitive diamantaire Nirav Modi had just been unearthed at the time) and the non-performing asset malaise in banks, in general, didn’t raise enough flags for Mistry who went ahead anyway.

Within two weeks of investing, Mistry lost Rs 50,000 as he decided to wind up his derivative positions. “I made a big blunder from my very first investments by trading in derivatives futures contract and not keeping a stop loss,” said Mistry.

When it comes to dipping fingers in equities, Mistry is not alone. For instance,, an online platform for equity investing, 40 percent of investors are under 27.

A smallcase is an investment instrument; each smallcase is a portfolio of stocks or exchange-traded funds that reflect an idea, theme or strategy. Smallcases platform can be found on brokerages like Zerodha, HDFC Securities, Kotak Securities, Axis Direct, Edelweiss and others.

Nearly 70 percent of stockbroking firm Zerodha’s customers are under 35.

Unfortunately, ease of technology doesn’t restrict youngsters from making crucial investing mistakes.

“Several millennial investors tend to follow the unprofessional approach like investing on random recommendations from friends / colleagues, following ace investors blindly, etc. while investing in equities and tend to register losses due to the short-term and mid-term volatility,” said Hitesh Chotalia, Head of Education at trading and investment institute, FinLearn Academy.

Stop listening to your friends; listen to professionals

One big mistake, experts say, that many commit while investing in equity markets is to listen to their friends, neighbours, uncles, aunts and everyone. Yet, we squirm when it comes to paying a fee for professional advice.

Pune-based Gaurav Kapoor, 25, followed a friend’s advice in October 2018 and invested his hard-earned money in penny stocks (those stocks whose share prices are less than Rs 10). He invested Rs 1.5 lakh after his friend had advised him to buy shares of small-sized companies on the back of expectations of rally in stock prices in this penny stocks.

But, in just two months, the value of Kapoor’s investment went down to Rs 25,000. He had learnt his lesson and later turned to a financial advisor who has now put him on a systematic investment plan of Rs 20,000 in a mid-cap mutual fund scheme.

Mrin Agarwal, financial educator and founder of Finsafe India said: “Most millennials don’t have the capabilities to analyse financials of the company, interpret the news. They often end up buying stocks on tips from friends / colleagues.”

Buy and hold is good, but learn to let go as well

An earlier Moneycontrol – CRISIL Research Ltd study published in January spoke of the merits of patiently staying invested through turbulent times.

The study pointed out that if investors who had invested in January 2007 in rising markets had panicked and redeemed in 2008 after the global market crash that happened on the back of credit crisis and had withdrawn at the end of 2008, investors would have lost 33 percent.

Those who had stayed invested till the end of the year of 2011, would have made a marginal gain of 4 percent. But if you had stayed on till the end of 2017, you would have made 16 percent. The study had considered the 20 largest equity funds at the start of 2007.

But that doesn’t mean you hold on to bad investments. Experts advise that when you buy equity shares directly, it’s better to have a stop-loss instruction in equities with a broker to sell a security after it reaches the price limit you had set.

Nithin Kamath, Founder & CEO of online stock broker, Zerodha said, “Having stop losses as a part of every trade will assist in being a disciplined trader without which some of the most common trading blunders will come to the fore. Stop losses need to be defined on a number of factors such as the maximum loss an investor is willing to take on a position, a risk to reward ratio, market volatility etc.”

Averaging stock price – not fruitful at all times

Often investors average the stock price by accumulating more quantity when the price of a particular stock from portfolio tumbles.

For instance, in 2017 Kinjal Shah, 25, residing in Mumbai decided to accumulate equity shares of Reliance Communications.

She invested on the back of reports that the firm was seeking a buyer for itself since it’s own debt levels were high. Her calculation was that if a suitable company acquires Rcom, the firm’s own share price would go up.

Happily, she started accumulating this stock at a price of Rs 32 per stock. The sale hasn’t yet happened, but in the meanwhile, Rcom’s share price has fallen to Rs 5.06 (as on closing price of 25th March, 2019). She kept on averaging the cost price by continuing with her investment in this stock.

She ended up investing Rs 50,000 and accumulated 1200 quantity of Rcom stocks. Shah says: “When I knew the company was not doing well. I should have not invested into it with certain assumptions or should have a stop loss while investing to reduce losses.”

CA Sameer Shah, CEO at Sameer Shah and Associates from Mumbai advised, “Millennial investor always needs to study the fundamentals of the company from annual reports, quarterly results and take a second opinion from research analysts who track the company before investing and accumulating the fresh quantity of the stocks.”

Mutual funds or direct equities; do SIP

If you don’t have the time or wherewithal to go through a company’s annual reports or cash flow statements, it’s best to stick to mutual funds. Numerous online platforms are available that help investors to invest in mutual funds.

Financial advisors and distributors also offer holistic financial planning to guide the millennials to invest across equities and debt.

Suresh Sadagopan, SEBI registered investment advisor and Founder of Ladder7 Financial Advisories said, “Millennials can commence investment if they are able to understand the schemes or else it’s recommended to take help of the financial advisor to identify goals and invest in a diversified portfolio analysing the risk appetite.”

Avoid the lure of direct plans in mutual fund schemes if you are just starting out. These are plans that facilitate investors to invest in mutual funds without any distributor in the middle.

Hence, direct plans come with a lower expense ratio as distributor fees are not embedded in them. Regular plans have distributor fees embedded in them as they are sold by distributors. But trying to save a bit of cost here and you risk of losing much more if you end up investing in the wrong mutual fund scheme by yourself.

But SEBI registered investment advisors can sell direct plans if you are opt for their fee-based financial plan; a much safer way to invest in equities.

Kamath said, “One of the easiest ways today to get started for millennials is SIP in mutual funds, more specifically index funds. It can be something as simple as a combination of Nifty 50 + Nifty Next 50 index funds.”

Financial experts say that as you gain some experiences and survive at least one market cycle, you can slowly consider part of your overall portfolio investing in direct equities after having exposure in index funds and mutual funds initially.

If I sell equity soon after I buy, I am gambling

A large section of investment population buys stocks in the morning and sells it in a day. This is called day trading and millennials should stay away from it.

Sadagopan said, “An investor in day trading might make money on one day and lose ten times the money on the next day. It’s not to be considered as an investment at all.”

Several millennials prefer taking a position in selected stocks for short term and plan to exit after achieving target price.

Amol Joshi, founder of financial advisory firm Plan Rupee Investment Services said, “It’s important to note that equity is affected by both micro and macro-economic factors. So, many things are not in control of investors while investing for a short period of time.”


Non-Accredited Equity Crowdfunding Investors Need a Path to Liquidity

PeerRealty, a real estate crowdfunding platform, recently introduced CFX, the U.S.’s first secondary market for equity crowdfunding shares. For accredited investors, this exchange will improve the liquidity of equity crowdfunding investments.

Unfortunately, only accredited investors can use the platform. Equity crowdfunding investments made by non-accredited investors remain as liquid as ice.

This lack of liquidity creates a big problem. With the implementation of the rules for Title IV of the Jumpstart Our Business Startups (JOBS) Act in June, non-accredited investors — people with less than $1 million in net worth or $200,000 in annual income if single and $300,000 if married — can now buy shares in private companies through equity crowdfunding portals.

But non-accredited investors can’t sell those same shares. Unlike accredited investors who can go to PeerRealty to sell their securities, unaccredited investors have to wait for the companies in which they have invested to go public or get acquired to cash out. And if venture capital and angel group investments are any guide to the time to exit for young companies, then these unaccredited investors will be waiting five to ten years for liquidity. Of course, that’s if the companies in which they have invested are the kind that will be purchased or go public.

Securities and Exchange Commissioner (SEC) Daniel Gallagher has recognized this problem, calling for a solution to the ill-liquidity of crowdfunding securities in a September 17, 2014, speech.

Specifically, he said, “I’ve called for the creation of ‘Venture Exchanges’: national exchanges, with trading and listing rules tailored for smaller companies, including those engaging in issuances under Regulation A.”

Congressman Scott Garrett, the New Jersey Republican who chairs the Subcommittee on Capital Markets and Government-Sponsored Enterprises of the House has taken the issue to Capitol Hill. He has put forth a discussion draft of the Main Street Growth Act (PDF) – a bill that would “amend the Securities Exchange Act of 1934 to allow for the creation of venture exchanges to promote liquidity of venture securities, and for other purposes.”

Not everyone agrees that the venture exchange concept is the right solution to the liquidity problem of non-accredited investors who buy shares in private companies through equity crowdfunding. The approaches being discussed most in Congressional hearings, and with the SEC, seem more like small cap stock exchanges than portals for making “pre-owned” equity crowdfunding shares available to other non-accredited investors – an approach some think is more fitting.

However, I commend Commissioner Gallagher, Congressman Garrett and others for recognizing that the federal government needs to do something. Allowing non-accredited investors to buy shares in private companies through equity crowdfunding platforms, as the JOBS Act has made possible, is only half the battle. Finding a way for those investors to sell their shares is equally important.

Sports Crowd Photo via Shutterstock


Should You Raise Money Through Non-Accredited Investor Equity Crowdfunding?

crowded street

U.S. startups can now raise money from non-accredited investors through online platforms. But just because this type of fundraising is possible doesn’t mean you should use it.

Non-accredited investor equity crowdfunding makes sense for certain types of startups, but not for others.

Here are five types of start-ups that should pass on equity crowdfunding to non-accredited investors:

1. Businesses that Need to Raise a Lot of Money

Early estimates suggest that the average equity crowdfunding investment by a non-accredited investor is around $1,000. That’s way too small for companies that need to raise several million dollars in capital.

Simple division tells us that a company that needs to raise $7 million would need to take on 7,000 non-accredited investors to meet its funding demands. That is far too many shareholders for a private company to manage effectively.

2. Businesses Needing Multiple Rounds of Financing

Ventures that naturally develop in a staged fashion — like bio-medical companies that need to first prove out their technology, then go through multiple phases of FDA approval, and finally manufacture and market a product — are going to have problems raising money through equity crowdfunding.

Non-accredited investors will likely lack the financial wherewithal to support additional, larger, capital raises. Moreover, when a company raises money through multiple investment rounds, it issues new shares, which dilute down the holdings of investors who do not put in additional funds.

Because few non-accredited investors understand the math of dilution, convincing them to make an additional investment that involves it will likely be difficult.

3. Very Early Stage Businesses

To convince investors to put money into new businesses, entrepreneurs need to persuade them of the future value of the ventures. That is very difficult when the investors have no information about product characteristics, customer adoption patterns, past financial performance or any of the more tangible dimensions on which investors evaluate companies.

Few non-accredited investors have the experience to make these kinds of evaluations, which makes convincing them to make those investments difficult.

4. Businesses that are Difficult to Describe in an Online Format

Because of the small size of non-accredited equity crowdfunding investments, pitching these investors in person is not cost effective. Entrepreneurs will need to pitch their ventures online. Attracting investors online will be easier for ventures that can be understood from viewing a video or seeing a description on a website than for ventures that require a discussion to comprehend.

5. Business-to-Business Ventures

Because people tend to invest in companies they understand, the pool of potential B2B investors on equity crowdfunding platforms will be small.

Unless the crowdfunding site is very large, and tends to attract people from the industry in which a given venture operates, entrepreneurs with B2B ventures will find it tough to attract enough investors to fill their funding needs through non-accredited investor equity crowdfunding.

Crowded Street Photo via Shutterstock

More in: Crowdfunding


Microsoft Reportedly Meets With Private Equity Over Yahoo Deal

Microsoft Reportedly Meets With Private Equity Over Yahoo Deal

Microsoft Corp executives are in early talks with potential Yahoo Inc investors about contributing to financing to buy the troubled Internet company, a person familiar with the situation said.

The talks are preliminary, the person added, and Microsoft is focused on preserving the relationship between the two companies. Microsoft and Yahoo have longstanding search and advertising agreements.

Private equity firms interested in Yahoo approached Microsoft, the person added. Microsoft declined to comment.

Yahoo is auctioning its core Internet business, which includes search, mail and news sites. The faded Internet pioneer has been struggling to keep up with Alphabet Inc’s Google and Facebook Inc in the battle for online advertisers.

Verizon’s Chief Financial Officer Fran Shammo said in December that the US wireless carrier could look at buying Yahoo’s core business if it was a good fit.

Activist hedge fund Starboard Value LP moved on Thursday to overthrow the entire board of Yahoo, including Chief Executive Marissa Mayer, who has struggled to turn the company around in her nearly four years at the helm.

Microsoft’s interest in Yahoo comes nearly a decade after another approach. In 2008, then-CEO Steve Ballmer tried unsuccessfully to buy Yahoo for about $45 billion.

Website Re/code previously reported meetings between Microsoft and investors.

© Thomson Reuters 2016

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Tags: Internet, Microsoft, Yahoo