Can you Become a Successful Stock Market Trader
Stock market trader recognize that money cannot be made easily all the time in the market. They back off for a while if the market is too volatile or choppy. A colleague once asked me, “Can you tell me one stock or investment pick that can provide a solid gain in 3-6 months?” He further asked that all he requires is “a simple option, where one can invest Rs.1 lakh today and get back Rs.1.4 lakhs in 3 months or say in 6 months if it takes more time”.
According to him a 40% return in 6 months should be a cool deal and feasible too. I frankly told him that I don’t have such a formula or sure-shot strategy. If I had such a ‘Golden Mantra’ which worked most of the time, I would be able to churn out a several lakh rupees in a year and later be able to generate millions. However professional stock trading or speculation is not easy and requires a lot of knowledge, skill and experience to manage a lot of risks.
Sensex – The Roller-Coaster
The Indian stock markets fluctuates a lot. On a recent roller-coaster ride, many people lost money, however a few patient investors who held on to solid blue chips are making good returns.
The sentiment towards investing is not positive, however, some people want to enter markets to atleast make a small gain in the short term. Why? They either don’t have patience to wait for the long haul and they want instant results – be it good or bad.
Who is a Stock Market Trader?
A stock trader or a dealer in Indian context is someone who has gained the requisite knowledge, skills and experience in stock markets. A stock market trader could be working in any of the following areas:-
- As a stock market trader in broking firms (or)
- As a stock market trader with financial institutions or mutual funds or hedge funds (or)
- As an independent stock market trader
Requirements to Become a Stock Market Trader
If you are going to work with a broking firm or a financial institution you will need to complete Capital Markets Dealers Certification provided by NSE or equivalent qualification provided by BSE or other institutions.
Secondly, you will also be provided hands-on training which is critical, and later you build on your experience handling clients, advising them, managing positions, accounts, etc. More than the theory, it’s the exposure to practical systems and markets which are critical.
Even an independent stock market trader goes through the above certifications and gains work experience before going solo. There are some who go solo and gradually build their experience using their own trades, however this is a long learning process. This also requires full-time commitment and some initial capital, which we will discuss next.
Our discussion in this article is about the success or failure of an independent stock trader, which most people aspire to become.
There is an old Wall Street adage, that “the easiest way of making a small fortune in the markets is having a large fortune.”
Many people have misconceptions about trading which I will try to clarify here.
Misconception: Stock Trading is Easy
Reality: Learning how to stock trade is easy theoretically. However, once you start trading with your money practically, you will realize that you are lost and need to learn more. Getting started is easy but sustaining and becoming successful is difficult and requires strong skills and acumen. (Its like saying ‘building a website is easy’ but consistently maintaining it with content, marketing initiatives and flow of visitors and income is a tough job)
Misconception: I can trade to make small side income with limited risk.
Reality: Many people assume that they can do trading as a small part-time activity and make some money. This is insane because you need to be closely wired to the market to monitor your position or keep stop-losses or book profits. Although you can do investing without spending much time, trading is a different game where you need to be alert all the time.
Some experts also recommend strategies such as Options Writing which does not require full-time attention. However, to become a master in this you will need a strong experience in derivatives trading and be prepared for the unexpected and know how to deal with it.
Hence, for people who are already working in other professions its not a good idea to venture in to trading. Moreover, you don’t want to take undue risk to earn a few hundreds or thousands, which will vanish in one single-day when you make the wrong trade. If you are looking for part-time income you should look at other options. Ofcourse getting started part-time is not a bad idea, but the idea of doing 2/3 trades in a week to earn thousands of rupees or dollars may not work consistently for long.
Misconception: I have limited money and limited time to invest, so trading suits me.
Reality: To get started in trading you need the knowledge (qualifications), experience, full-time commitment, initial capital and some back-up funds. If you don’t have any of these start planning for it before venturing out. If you start off with limited funds and don’t spend time you are simply wasting time and making money for your broker (not good for you!)
Misconception: Only stock market traders can become successful in markets.
Reality: This is biased view. There are success and failures stories in both investing and trading – so this view is not justified. There have been successful traders and successful investors. You can choose to go the Trading way or the Investing way as per your needs, skills, strategies, etc.
Can you remember any stock trader who made it to the top 50 in Fortune 500 or other lists? There could be a few, but there were several people including businessmen who were long-term investors. This is not to say that ‘Investing’ is superior, but to show you how investing can create long-term wealth.
Misconception: Once I have all the requirements I can be assured of higher possibility of success with minimal loss.
Reality: The above statement is true to an extent that you will be prepared well for trading profession. However, there is no guarantee that you will succeed. Your success or failure depends not only on your capabilities but also on the market conditions, how you are able to practically implement your learning, etc. There are several factors which can affect your trading calls – be it international markets, availability of capital, use of right techniques or tools, etc. Preparation will definitely help you but you need to practically work and execute trades to get the feel of how things work and then get in to full-time trading.
Misconceptions: I can follow the trading calls or recommendations provided by specialists.
Reality: This is an easy way of doing it. Don’t follow the trading calls or advise by experts because that’s as good as a “copy-paste” work. Instead try to learn the skills and do your own research and use your own judgment. You can still use other recommendations only for reference purpose while keep your own homework ready.
Misconceptions: I can mix trading and investment so that I can get the benefit of both. If a trading pick goes wrong I can hold the stock as long-term investment.
Reality: Trading and investing are two different types of games and mixing up will land you in deep trouble. Unless you are well-versed in both you should not be doing this in the first place.
Secondly, lets say you buy a stock for trading and it incurs 5% loss. In this case don’t hold it as investment to recover costs, . This will block your capital (restrict further traders) and if stock drops further (another 4%) your capital will erode further. Instead of keeping the stock you should sell it and book your losses so that your losses are limited to that extent (5%). So avoid mixing up the two at any cost. You have to be clear about the strategy before you put in your hard-earned money in trading or investing.
If you want to know more investing in stocks please read this – How to Invest in Stock Markets in India?
For people who have the knowledge and skills in stock trading, I would advise you to start in a small way to test the waters (understand markets) before you take the plunge in to full-time trading. Remember, that becoming an independent stock market trader is not easy because it’s a high-risk high return game.
I never attempt to make money on the Stock Market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”- Warren Buffet. (Tweet this)
The challenge is to be good enough to generate regular income to support your family and at the same time reduce/contain your risks. Before you enter in to the world of stock trading make sure you have the right skills, experience, capital and have enough preparations to ensure a smooth journey.