Does and Don’t of Trading

There are some basic tips while trading the equities.

  1. Of course you are doing this to earn profit, but like profit, loss is also an aspect of trading. Have courage to accept the little losses so as to capitalize on the opportunity cost.
  2. Patience are always rewarded in share market. So don’t rush to sell a non moving value stock of course unless you need the money immediately or you have spotted a growth stock.
  3. Opportunity cost – This one is actually from economics or management, it is the loss of other alternatives when one alternative is chosen. Choosing a stock is bit of difficult and after choosing one, if it fails to move and the left alternative starts to move, don’t switch your investment just for that reason. Else you will lose both momentum buses. Have patience. (This one behavior will discipline your decision making memory muscle which will also help you in your life)
  4. Don’t trade based on the SMS blindly, even if it is from your broker. And absolutely do not act on unknown tips. In any case Always check the graph of such stocks.
  5. Don’t chase frenzy momentum, else you will end up buying at high price and suffer loss. Don’t be sad if you miss one bus, there are plenty more look for them. You must check why that stock is running and invest accordingly.
  6. There is something called as support and resistance to a stock, that is a falling stock don’t fall below certain levels. Even if it comes down to such levels it bounces back to some upper level where it faces resistance. You need to check if a stock is stuck in this range. Identifying these patters is part of technical analysis and we are going to see this in next article.
    Eg. Asian Paints, Idea these are stuck stocks. Asian paints have upper resistance at 1200 and support at 1100. Same for idea, Resistance at 110-115 levels and support at 75. Wait for breakout, check 200 days moving average. (as of 10/01/2018)
  7. DON’T invest in such range bound stock without a confirm big news such as merger or big contract award.
  8. Historically The market has some seasonal favorite sectors, and times of Buy
    such as Agriculture and allied activities, railways related stocks during budget, strong buying of a growth stock before quarterly results, seed stocks during monsoon – you get the idea its about what will be sold the most.
    Also, In India some sectors are evergreen due to their demands – sectors like consumer goods, FMCG, Housing and NBFC. The 1.2 Billion Indians are going to consume no matter what share market says. So You can buy such good stocks. But you will have to be patient! as these sectors have already rallied a lot.
  9. Bonus, Buyback, Dividend and splits
    The stocks that announces bonus share, Share buyback, dividend, and split usually rally. keep checking this link
    Bonus share: means the company gives some shares free to its investors. Recently mahindra and mahindra issued 1:1 Share. This reduces share price and thus increases liquidity.
    Share buy back : Its when a company buys back the issued shares, this reduces share supply as a result the investors get better price to their shares.
    Stock Split : usually The stocks are issued on face value 10 and then whatever extra price the final stock gets is called as premium. In stock split they dilute the stock price to increase liquidity.
    Dividend : When company shares its profit and reward the investors.

    In all of above cases the stock moves upwards. If you buy sooner you will most certainly get some profit. Never miss the The bonus shares of good stock, they are worth investing it. Dividend, not so much because soon after issuing dividend the share fall by some level.
  10. Averaging – If you believe that you have purchased some value or growth stock and it is making some loss, then you need to buy more stocks into your holding. This averages your buy price. Many people fail to do this and suffer huge loss or wait too long.
    Eg. Before the big pharma sector fall, Sun pharma was trading at about 700 level, and then it fell to 470, not in one day but over few trading days. If someone had that  stock at 700 level and added more 10 or 20 stocks at 470 then the average price would have become = (7000 + 9400)/30 = 546. Sun pharma after 3-4 months bounced back upto 595, thus this person would have made profit. You will learn these judgement by experience. This often works for quality stocks.
  11. When you trade, the market experts talk about support levels. You need to keep an eye on these levels. I am talking about the Nifty supports. Eg. Currently the market is at 10600+ for this support is at 10550. Also, the budget is scheduled for February 2018 and till then nifty target is 10700. These targets are determined by the technical analysts. You dont need to do that analysis the CNBC TV18 experts will let you know.
  12. In earlier article, I talked about buying a stock on correction. But some growth stocks never stop to correct. They just run and run. There is inherent risk in entering such stocks. There are always outliers stocks and trends and you just need to be cautious. Eg. HEG, Asian Granito etc. The only valid tip is If you already owns such stock, if they are value plus growth stocks, then add them more.
  13. There is something called as futures. Its the real money making thing. You will hear about nifty future and future of some stock. Futures are about speculating the future price of a stock or value of NIFTY index itself. By knowing the futures you can know where your holding stock can go. Notice, future prices are not real future but just a speculation. This is not a compulsory info. if you don’t understand this or know it, its all right. Just spend some time in morning at 8.30 or in noon at around 2.30 to check market pulse on CNBC TV18.
  14. Finally, Don’t forget to book profit when your targets are met. Don’t be greedy. You can repurchase a stock. But have some vision in trading. Planning is essential in finance market.

You will learn more as you will trade with support of some technical some fundamental analysis and some tips from trade experts. I know that in short duration I gave too many terms and stuff, but as you will start facing the market you will get use to them. Share market gives a vantage point about economy. I wish more and more people enter into the market and understand the real nature and spirit of capitalism.

They need to know what really brings food on their table, something much much relevant to daily life. Instead on talking about mundane and rhetoric discussions on religion and past, The youth need to develop this outlook to look at the glorious future that India can have if we let our economy grow properly. We all are going to benefit from this prosperity.

Another idea is to give an perspective about economic thinking and rationality, something beyond the usual emotional thinking that we are accomplished to. Be money wise and adopt economic thinking in your daily life, this will transform your aptitude towards life and you will make better decisions.

Share this series of article if you find it useful, If you know better source than this information, please share that here too. If you are still skeptical about trading and/or don’t have times to trade, don’t feel disappointed. you can still benefit from the share market. You can invest via mutual funds. The next series of article will be on Mutual funds. I will upload it soon.

Here is a summary of your Journey to trading,

  1. Basics of Shares,
  2. Equity Related terminologies
  3. Some technical stuff that you must know
  4. Some cautions and introduction to trading platform
  5. Some does and don’t of trading. You are here.

Thank you.

4 thoughts on “Does and Don’t of Trading

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