If you have just opened your trading and demat account with your broker you are surely excited about your maiden journey into equity trading in India. Your new trading account is your passport to exploring the exciting world of equities. After all, you have heard that only equities create wealth in the long run and this is the right time to start. So here are 10 such trading rules to keep in mind if you just about starting off trading in equity markets..
1. Ensure that online trading is activated on your account
Having an online trading account is not compulsory. You can also walk into your broker’s office or call up your broker and trade in the markets. But, there is no disputing the fact that an online account gives you tremendous power and simplicity. Online trading is flexible to the extent that you execute transactions either sitting at home or even when you are travelling to work. Above all, online trading account gives you the benefit of better control over your trades. Do get your online trading and demat activated simultaneously.
2. Avoid stock tips, listen to research but do you own homework
As a trader you will get a lot of stock tips to get rich overnight. Just avoid these tips. They are either sent by people who do not know anything about stock markets or by people who have a vested interest in the price movement of a stock. Get your broker to give you short term and long term research ideas. At the end of the day, you must apply your due diligence before taking up any buy or sell recommendation.
3. There is nothing as comforting as putting a stop loss while trading
A stop loss is your insurance against volatile markets. After all, rather a small loss today than a big loss in the future! The whole idea of a stop loss is to protect your capital and therefore never get into a trade without a stop loss. Even if it means that your stock touched the target after triggering the stop loss, it is OK! When you trade without a stop loss, you expose yourself to a huge capital risk.
4. Profit is what you book; all else is book profits
This needs to be understood in the proper perspective. It is not contrary to our view that equities are long term investment products. But when you see profits in your trading positions, book the profits and see your trading account balance increasing. Even when you are having a long term view, you can always look to periodically book profits in the midst of volatility without disrupting your view on the stock. It is also a way of being in cash when the markets correct.
5. Avoid the herd mentality because the herd never made money..
It is quite common for traders to be carried away by what others are doing in the market. People tend to buy certain stocks just because they are being talked about in the market or because some large influential investor has bought them. In the stock markets it always pays to buy in the midst of fear and sell in the midst of greed. If you follow the herd instinct, you can never manage that.
6. If you can consistently buy low and sold high, you are either God or a liar..
Nobody, not even the greatest investors, managed to consistently buy low and sell high. Even the likes of Warren Buffett only look for the margin of safety while buying stocks and do not obsess themselves with catching the bottom. If you wait too long for catching the bottom or the top, then you will end up doing just that; Waiting.
7. Different trades in the market have different tax implications..
Worrying about taxes on equities is not just for large investors but for every investor. For example, if you sell a stock in less than 1 year then it is short term capital gain and is taxed at your peak rate. Intraday trades are speculative trades and they cannot be set off against other delivery trades. Holding for more than 1 year makes equity capital gains tax-free up to Rs.1 lakh per annum. Beyond that you will have to pay 10% tax without indexation. Also, booked losses can be written off against profits but notional losses cannot. Understanding taxes and building them into your strategy can make a big difference to your returns.
8. Go through the contract note and understand your costs
This is very important if you are starting out on your trade. Brokerage is one of the costs that you pay. There are other statutory charges like securities transaction tax, stamp duty, GST and SEBI turnover fees which the broker collects from you and deposits with the government. All these costs are clearly mentioned in your contract note which you get whenever you trade. Also check that the price in the contract note is the same as the price confirmed to you.
9. For every trade, keep a positive risk-return trade-off
You are in the equity markets to make money and that is only possible if your potential profit is more than your potential loss and if you are profitable more often. Risk-return trade-off is all about how you set your risk and return levels. For example, if you are buying a stock and keeping a stop loss that is 2% lower; your profit target should at least be 6% higher. That will ensure a positive risk-return trade-off of 3:1 on your trade. Also check the profits you are making against the costs that are debited in your ledger and let that be more than what you would earn on a passive index fund.
10. Your primary job is to protect your capital
This is something you must never lose sight of. Whether you are trader or an investor, your task begins with protecting your capital. Set capital loss limits for your short term trades and for your long term investments. None of us trades with infinite capital and hence protecting your capital forms the core of equity markets.
There is not too much of rocket science about equity markets, but there is a lot of common sense and discipline involved. This can be your starting point.