Take stock before trading

The Yes Bank debacle and the closure of six debt funds in Franklin India may have spooked debt investors. But equity investors remain unstoppable. CDSL data suggested 12 lakh new equity investor accounts were opened in March and April 2020, up 33% from the previous two months.

BSE data showed a significant spurt in the client (individual investor) category turnover compared with a year ago.

New-age online platforms, too, spoke of robust growth in new brokerage account additions with as much as 65% of them being first-time investors.

The point made by many brokerages — attractive valuations and quality stocks available at good prices — are attracting investors. But, could it be possible for first-time equity investors to discover ‘attractive valuation’ and ‘quality stocks’ within two months of their entry into equities? Strange!

I gathered more on social media. Video and learning apps and webinars on how to trade were selling (yes, even paid ones) like hot cakes. Okay, lockdown has forced people to channelise their energy into learning. And, needless to say, it is instant gratification (through trading) that most want. And then, you hear this: the shocking news of a 20-year-old trader who thought he lost $7,30,000 in trading. Now, I am not here to tell you that investing is all about the long term and dismiss trading.

In reality, trading in the market is an important activity that is fundamental for price discovery of stocks.

However, stock trading is one of the hardest things you can do and therefore, the most difficult to make money from. So, it is best left to professionals who have honed their practice over years of experience.

What is happening now is probably this — a combination of easy-to-use, free/low-cost trading platforms, plenty of time at home during this lockdown and also, increasing insecurity about keeping a job and the need to generate other sources of income, could be driving many young Indians towards the seemingly lucrative business of trading. If you are one among them, and thought trading was an easy way to make money, you will do well to know the following.

Not a part-time affair

Successful traders seldom do trading part time. These are folks who have left their jobs, after several years of also investing, and pursued trading as a serious activity. Trading is not a hobby because you can lose real money.

It takes several years before one can master techniques in stock trading. First comes the knowledge and then comes the experience. It is good to learn and try techniques with small exposures but you are in for a risk when you try these with leveraged bets. When I started with equities close to two decades ago, I knew amateur traders who would stick to the cash market, while the more professional traders would use leverage. Leverage, or margin trading, is the act of taking stock market positions worth more than the money you possess. That means you borrow money for the difference.

When such experts use leverage, they do so when the path to profit is very clear to them. They tend to diligently stick to their plan, decide on an optimal position size to minimise risk, assess risk-reward and thereby, the potential loss and make sure their capital is not overexposed.

They make sure their losses in a trade are restricted to 1-2% of capital. Unfortunately, not only the right strategy but also the check of emotions, comes only with time. And that will come provided you are strong enough to stay without getting hurt.

Ease of transacting, a trap

With a spate of zero-cost platforms, and easy access to margin, leveraged trades have become easier to access and therefore end up on top of a young trader’s list of feats to be achieved. New investors seldom understand that there is no such thing as ‘free’, and often do not factor in some implicit costs (such as an ask-bid spread). As online platforms also make available plenty of charts, many trade daily, using daily charts. Top traders seldom do that. They like to see how the story of a stock unfolds; they see the bigger picture. A trader may trade less and make more money looking at slightly longer period charts.

Online brokerage platforms also make available plenty of learning material for you. They equip you so that you make money for them. Watching a few videos and hearing free advice definitely doesn’t amount to learning trading. If you ask yourself what technique you really follow for each trade and don’t have a proper answer, you are not a trader.

Money tucked away

Professional traders have a comfortable kitty they can fall back upon. They would have put away enough money for their life’s goals and would already have invested for the long-term and even have some money tucked away in fixed deposits. Some professional traders even set aside an emergency fund as high as one-year’s living costs.

For those who wish to make a living as an equity trader, having a significant chunk as capital is necessary.

Otherwise, you cannot think of building wealth. Not having a substantial sum as capital brings in other risks. For example, someone trying to get ₹50,000 a month from a capital of ₹5 lakh would likely push herself to adopt high-risk strategies that can wipe out capital and cause losses. If you think you are still cut out for it, learn slowly and steadily; first master the art of losing less. As the Wild West song goes “you’ve got to know when to hold ‘em, know when to fold ‘em,”

(The author is co-founder,

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Printable version | Aug 15, 2020 8:24:56 PM |

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