Top 3 Reasons Why You Should Not Opt For Stock SIP

Systematic Investment Plan aka SIP has been one of those few attractive route to equity investment for retail investors and this has made many stock brokers’ to come up with what is called Systematic investment plan into stocks or Stock SIP. As far as I remember it was ShareKhan (ShareKhan review) to pioneer this and now we have the same at ICICIDirect (ICICIDirect Review) as well. I am sure slowly every broking house will adapt to this but is it right for the investor or is it only best for the broker’s. Let me share my views on the same.

1. Bad Trade Execution

Stock SIP’s are normally executed as market order and rest assured no pro trader or a savvy investor should ever do that. I never ever execute a market order. It is always a limit order.

2. Buying into the morning spike

SIP Orders are placed on the specified date before the market opens (at least ShareKhan does it that way) which actually means you are buying into the morning spike and paying the price higher than probably you could have purchased yourself.

3. Time averaging and not price averaging

Your next purchase in a stock is not because you have seen a downside in price but mainly because your time to invest has come. Let’s say that you purchased Stock A at 1000 Rs. After a week or even a month you see that the same stock is at Rs 950 or even 1050. Should you purchase more? The rule I follow is – I never average it before a 10% fall or a closing above resistance with strong volume but for equity SIP you average at whatever price you find the share at a given day. Not ideal for investment.

Why Equity SIP is being adopted by brokers?

The answer is brokerage. Mutual fund SIP has been very successful product for small retail investors and after eradication of entry load from mutual funds these brokerage houses are not getting the commission for such a great product and so they have come up with same great looking product (not a great product) “SIP for stock” where they can bag the commission for those small retail investors for whom the term SIP always works.

I have never done any stock SIP and don’t have any plans to be doing so as well. Are you doing stock SIP? If you have done Stock SIP share your experiences and returns in comments below. Shared knowledge can help many other fellow investors compare and judge the new way of investment.