Welcome to the Jungle
A guide to navigating the wilderness with the who's who of the Stock Market
The Indian stock market is a beehive of activity. A vibrant ecosystem teeming with life. Some parts are dangerous, filled with predators and traps. Some are like sunny glades and beautiful meadows.
You will find many exotic fruits with a sweet aroma. They may be tempting but could be poisonous or cause severe allergic reactions.
Before entering the jungle, it is important to understand what you are up against.
In Part 3 of the New Investor Series, we will learn about the players, the laws, and the ecosystem of the Jungle that is the Stock Market.
Let us first see the pecking order of the jungle.
The Food Chain
Herbivores - Retail Investors
The deer, zebras, and the buffaloes. This is you and me. Ordinary investors navigating the market. Retail investors find their financial path in the market—with different risk appetites, goals, and strategies.
I’m happy to tell you that we don’t have any control over the market or the prices of stocks. We’re completely at the mercy of The Predators. Cheerful isn’t it?
Our only hope of success is to explore the hidden territories, weather out the storms, and survive in the Jungle.
All I want to know is where I’m going to die so I will never go there.
— Charlie Munger
Supreme Predators - The Institutions
These are the big fish. The Elephants, Tigers, and the Lions. They influence the smaller players and drive the market movements.
Large Mutual Funds, Foreign Investors, Insurance companies, etc fall into this category.
Example: If an institution places a sell order worth ₹1000 Crores, the chances are pretty good that the stock price will fall. It will swallow your buy order for ₹50,000 whole. Delightful.
But all is not lost. By aligning your interests with those of the big players, you can ride the elephant. If you get to a hidden gem first, with the institution pouncing on it later—the rewards can be great.
The Scavengers—Day Traders and Speculators
The day traders and speculators are like the vultures and hyenas of the Jungle. They try to take advantage of short-term fluctuations in stock prices to buy low and sell high.
They buy and sell stocks without regard to the underlying business. They hold stocks for a very short period—sometimes a few minutes only.
A speculator chases short-term thrills, without regard to the fundamentals of the underlying ‘horse’ they are riding.
The Landscape
The Watering Hole—Stock Exchanges
The National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) are like the watering holes of the Jungle. This is where all players big and small converge to buy and sell stocks from each other.
The Stock Exchange facilitates transactions and ensures they are carried out fairly.
Example - Say you want to sell 100 shares of Infosys. Your chances of finding a buyer by shouting at the top of your lungs from a tall building are pretty grim. The answer? Go to a stock exchange like NSE.
How do you tell a stock exchange about your orders?
The Vines—Brokers
The brokers are the vines connecting the participants of the Jungle. They facilitate transactions.
Brokers are members of a stock exchange and they take your orders to it. Typically, your broker will give you access to a Trading Terminal. A terminal is your window into a stock exchange. You can see the prices and quantities at which people are willing to buy/sell stocks.
Where do stocks live?
The Trees—Depositories
A depository is a Tree that stores your flowers and fruits.
As your money resides comfortably in a bank account, your stocks live in a demat account.
A depository is an institution that holds stocks and mutual funds in electronic form on behalf of investors.
NSDL and CDSL are the only two depositories in India.
The Guardian of the Jungle
The Hawk—SEBI
The Securities Exchange Board of India (SEBI) is the hawk that watches over the Jungle.
SEBI makes and enforces the rules of the jungle and educates investors with awareness campaigns. It heralds progress with technological advancements and new financial innovations.
It also ensures fair play among investors and protects them from malicious predators.
This was a bird’s eye view of the Stock Market Jungle. We can divide the type of participants into further sub-parts depending on how they behave.
Reply to this email with more jungle analogies!
Cheers :)