Are you a Trader or an Investor
Stock Markets are known to give best returns in the long run if we invest for a period of 5 years. But you can also make money in shorter time frame of 5 days or even intraday i.e single day. But there are certain rules of each game to play and equity markets are no different.
Before you come to stock markets after opening demat account with any stock broker, you must decide whether you want to invest, trade or just become a momentum player and ride the momentum when you see the bottom of the market and play for 10% upside in the markets.
Getting Started in Stocks
What Generally Happens
People who are new to stock markets after discussing it with their young friends open demat account with some capital, say Rs 100,000. They just plan to become rich overnight and desire or aspire to make it to Rs 2,00,000 in a month’s time. With the aspiration of earning big time in short span of time, they would ride on some momentum without having a time horizon in mind.
Once they put their money into stock and that stock start sliding, they would refrain from booking losses. Buying stock on tips for trading & riding without a stop loss order can end up making your trading capital down by more than 50% in single trade.
What you should do
1. Identify the Type
Every individual before entering into stock market must identify for how long does he wants to keep his position open or what is the time horizon of the investment he is making. Ask yourself – are you a trader or an investor?
Many people come to stock markets and they are not clear about the risk appetite and the time they want to spend in stock markets. One must adopt a disciplined approach to investing rather than just playing with your one or two month salary that be Rs 1,00,000 or Rs 2,00,000 which is your trading capital in this case.
2. If You are Stock Trader
Generally stock traders have lower time horizon which should be not more than 4-5 trading sessions for one position. The other way to make money is to trade in a single day i.e intraday trading where you close your position the same day and don’t wait for global cues to go against you next morning.
A trader normally uses technical analysis to see which stock he should buy. One must recognise that technical analysis accuracy is around 70% and 30% trades are bound to fail. But one must have a risk to reward ratio of 2:1 so that even he make loss on 3 out of every 10 trades, he would be in profits.
One must decide his/her stop loss order just before entering the stock market trade. Normal stop loss strategies say that it should be keep 0.5% below the previous day low.
3. If You are a Momentum Player
A momentum player buys the stock when they confirm the stock trend change on technical charts and rides the trend as long as it is profitable. The time period of holding such stocks is generally in weeks and months. “The trend is your friend” strategy holds true for such momentum players and they must keep two things on the back of their brain
- They must maintain a strict stop loss order without any change to it once set
- They should not have exposure of more than 3 times of what their trading capital is
Don’t become greedy if you see your position in profits and aspire for profits which are not possible. Almost 80% stock traders lose their trading capital as they mix their emotions and let that influence their buy or sell decisions and such things make them think irrational.
Keeping entry points of trade separately, exiting a trade at the right time is extremely important in stock trading. One must use moving average to judge whether the stock is in uptrend or downtrend and always play with the stock trend.
If the stock is trading above 200 day moving average, it means the stock is in long term uptrend and if the stock is trading above 50 day moving average, it means the short term trend is also up for the momentum trader
4. If you are Investor
If you are an investor in stock markets, one must look at the growth stocks to buy for long term i.e for a period of more than 3 years. Identifying best companies to invest into is most challenging part face by any investor. One must understand the company fundamentals and the business and balance sheet and management structure & experience before you finally look to invest in stock market.
A prudent investor should review his portfolio atleast one a year that may be near to elections or may be near to interim budget every year. If you are investor, let me give you an overview of some scrips which have done pretty well in the past 10 years
|Name of Scrip||Price adj in Apr 2002||Price in Apr 2014||Returns (%age)||Money Multipled by|
Think before you come to market, whether you want quick bucks or you want long term capital appreciation or just want to play with your money and make your stock brokers rich. So, it is okay if you are a trader or an investor. But, dont try to be both with the same stock.!!