Updated: Feb 5, 2020
Share trading is considered one of the riskiest ways of earning money in a short time because it requires skills, knowledge as well as luck to be a successful trader.
Share trading can be bifurcated into three categories-
- Value Investors
- Swing traders
- Intraday or day traders.
Value Investors are the ones who follow fundamental analysis and invest in the stocks for the long term. Value Investors hold shares for a long term ranging from 3 years to 10 years. We have lots of examples of successful investors who have taken share trading as a profession and became billionaires such as star investor Rakesh Jhunjhunwala, Radhakishan Damani and Porinju Veliyath.
Swing trading and Intraday trading can be termed as cousins because both trading practices aim to make short-term profits based on technical analysis a.k.a. price fluctuations in the market. While day trading involves buying and selling in the same day, swing trading means buying and holding stocks for a few weeks before selling to take advantage of rally.
Let’s go through the golden rules that you will follow to get the best out of your share trading.
10 Golden Rules of Share Trading in India 2020
#1. Learn everything before starting
First of all, watch how the stock market work. Start slow, observe the market and practice on a virtual simulator (you can find many virtual trading platforms online) for a couple of weeks before putting your hands dirty into trading. Take enough time to understand the flow of the market, and see how the market fluctuates with any news and how you should react to get the best out of it.
Avoid start trading until you get into the flow of things. Trading is investing in businesses so business rules implement here as well. Trade small until you develop a strategy for your investments, and then join the bandwagon. Don’t get yourself stuck in the start.
#2. Invest in business you understand
You should keep one thing in mind that you are not investing in a stock. In fact, you are investing in a business. So, you should always invest in a business that you understand.
In simple words, before investing in a stock, you must know what business the company is in and what are their vision, goals & strategies.
#3. Use stop loss
You can use stop loss in your day trading to reduce losses. This is the best way to retain the gains you accumulated while keeping losses in check. You can fix a stop loss for your stock, when your stock hits a specific price number, it will be sold off at that stop loss level.
#4. Avoid emotions while trading
Emotions are of two types – Greed or fear. Greed starts when you hear stories of fabulous returns in a short time span. People start speculating without understanding the company, their business or without any research (in simple words). Being a trader, you should never think of making money in a hurry. You are here to invest in a business and trade money out of that, not to speculate blindly.
Don’t try to make more money in less time. Instead, closely look at the markets and price movements carefully and then take your call.
Fear, on the other hand, arises when your research is weak. When the market is crashing and you sell your shares at rock bottom prices, you burn your hands instead of creating wealth from stocks. Not only selling at the wrong time, keeping a share or buying more shares being emotional to reduce your loss also happens. It sometimes results in a big loss.
First of all, understand the market well. Do your proper research about any stock (business of the company) and then you will make the right decision irrespective of market ups and downs.
#5. Follow A Trading Strategy
Professional traders never trade emotionally or the tips they get from random companies or self-proclaimed stock experts. Neither they go after what catches their sudden attention because they know it’s not good for the long run.
They always do research and follow a winning trading strategy, plan their trades based on that strategy.
You should also follow the same process.
#6. Trade with what you can afford
Always invest your surplus fund. Don’t trade with borrowed money. You should not allocate your money in trading that you have saved for paying the loans or bills. Be prepared to lose all the money while trading.
Also, the capital should not be part of your core savings. It should be your idle cash sitting in FD or savings account with no certain use.
#7. Avoid investing all your money at once
Trend is your Friend and you should flow with it. However, instead of investing all your money at once, you should spread it in equal intervals to minimize your chances of making a loss.
For example suppose you want to buy 800 share of SBI. Start with buying 200 shares and then see the trend of the stock, if it keeps rising than buy the next lot of 200 and if the trend continues than buy the remaining 400 shares. This way you can increase your chances of booking profits.
#8. Diversify your portfolio
The worst mistake of share trading is putting all your eggs in one basket. You should diversify your portfolio to limit the losses. Choose shares from different sectors to avoid getting trapped and minimize your chances of making losses.
For example, you have Rs.2 lakhs to trade with, so rather putting all your money in one sector say banks, spread it in at least 4 shares of different sectors. Such as going with SBI, Sun Pharma, Airtel, ITC rather than sticking with only one sector.
#9. Never lose more than 10% of capital investment
You should never stick with a weak stock. Capital Protection is very important for you to survive in the share market. If you find your invested stock is falling beyond 10%, exit from it straightaway. You can use Stop-loss (as discussed in Rule #3) to restrict your losses at a certain level.
Suppose you are buying a share of Rs.100 and set a stop loss at Rs.95. As soon as the share price hit Rs.95, the share would be sold automatically and your losses would be limited to Rs. 5 only. While entering a trade, you must decide the amount of loss you are willing to take.
Another important rule is to exit from your positions if you brokers calls and asks for more margin money or cash due to reduction in stock price. You should never average out and become an involuntary investor. You should rather book losses and wait for the right time to enter again.
#10 Avoid trading without any reason
Never do random trading without any logic behind that. Stay away from trading purely based on some news because it takes a few minutes for the stock price to adjust to any news. You should have some solid reasons to enter and exit from the stock.
Just because a stock is gaining little momentum and appreciated a few points is not the reason to sell it. Till the time the overall market and the stock does not show weakness, hold your positions.
The golden rule says – Cut your losses and let your profits run.
You should prior decide how much profits you wish to make before entering into any trade. As soon as the profits are met, sell half of your shares and book profits. This way you can cherish the rally as well as maintain the cash reserve.
Do you think you can immediately start share trading with all these tips? The answer is big “NO”. You need to be disciplined and should develop a few skills, including the ability to understand technical charts and analysis before beginning share trading.
Always remember, trading is like swimming. It is not as easy as it seems from outside. You must train yourself before getting into the waters if you don’t want to drown in the middle.
Share your thoughts in the comments.