A return of 6 percent per day is, well, nearly mathematically impossible.
It is a question that would be incredulous, if only it wasn’t so commonly asked. Traders are dabbling in the stock market with expectations — and asking questions to that effect — that would nearly be mathematical impossibilities.
A user on Quora asked: “How can I make 6 percent profit per day trading in the stock market?”
A seemingly innocuous query for those not very well versed with the concept of returns and compounding. For those who are, a 6 percent profit every day, compounded daily (with profits reinvested) for a year would mean Rs 10,000 would grow into Rs 3,797 crore. This is not counting weekends, on which markets stay closed. Do the math yourself.
What compounds (no pun intended) the situation is the fact that so many believe returns on the scale of 6 percent every day are possible.
“I might not say it’s not possible, but yes it’s difficult,” said one person in reply, before he outlined an options strategy that he said fetches him up to 14 percent in 90 minutes. Options are high-risk, high-return financial instruments that allow a trader to speculate on an underlying asset’s price movement. As with all things in the market, however, there is no sure-shot way to be certain that all your bets pay off, even with a “straddle” option strategy, which limits a trader’s potential loss.
Another user, representing a service that provides share market tips, said “6 percent is very less… if you try you get more than 6 percent also”.
A third user advises watching stock tips on a business news channel, through which one could earn “4-18 percent daily”.
Others advised caution, with one user rightly pointing out that if such returns were possible, a trader could grow his capital to thousands of crores.
Why do investors expect such high returns?
Stock prices tend to be volatile, with the best-performing stocks rising as much as 20 percent in a single day, sometimes more.
This could sway trader’s emotional biases, making them believe it is possible to consistently pick stocks that are performing well, ignoring the long odds they face (there are thousands of stocks trading on the exchange and hundreds that offer derivative contracts).
Professional day traders, who carry out several trades a day, hoping to close their positions before trading concludes, focus on gains of a few basis points on each trade while limiting losses to the minimum (these traders are aptly called scalpers, who try to skim small profits off each trade). A basis point is a hundredth of a percentage point.
The Indian stock market has netted annualised returns of about 15 percent historically, returns that beat other asset classes such as gold or property. The best mutual funds outperform this by a few percentage points.
Warren Buffett became one of the world’s richest by having his Berkshire Hathaway clock a compounded return of 22 percent every year for a long time (over 50 years).
Those targeting a return of 6 percent every day should know that if they could actually make that return, they will have made $2.1 trillion on an initial investment of Rs 10,000 by end of year two, which is roughly the size of India’s GDP.
Going by that, the individual will become 25 times richer than Warren Buffett in just two years.
