Things To Keep In Mind While Starting Trading In The Equity Market
Indian equity markets have witnessed a large influx of new Demat account holders in the past few months. Millions of young traders have been attracted to discounted prices. Exploring the world of equities is a good step towards financial growth. However, if you are among the first-time traders, you should be aware of certain trading rules to avoid losses.
Ensure that online trading is activated on your account
Although having an online trading account is not compulsory since you can always contact your broker, having one makes trading simple. Online trading is flexible and helps you make a trade remotely. Therefore, it is advised to get your online and Demat accounts activated simultaneously.
Avoid stock tips, rely on your research
A stock tip that seems too good to be true should be avoided. Most people who offer tips promising overnight windfall have vested interests. Instead of shortcuts, you should rely on your research. Get short term and long-term research ideas from your broker. You must be aware of every potential risk involved with investments before acting on recommendations.
Use stop loss while trading
A stop loss is your insurance against volatility. Using a stop loss can protect you from heavy losses. By limiting capital risks, you can benefit in the long run.
Avoid the herd mentality
As a victim of herd mentality, newcomers often buy stocks just because they are being talked about in the market or because a successful investor has bought them. In the stock market, you must make informed choices.
Different trades in the market have different tax implications
Worrying about taxes on equities is not just for older investors. For instance, if you sell a stock in less than a year, it is considered short-term capital gain and is taxed at your peak rate. Intraday traders conduct speculative trades which cannot be compared to delivery trades. Holding assets for more than a 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. Therefore, understanding taxes and incorporating them into a strategy can make a big difference to your returns.
Go through the contract note and understand the costs
One of the most important practices before trading is to go through the contract note and understand the costs. Apart from the mandatory brokerage, there are other statutory charges like securities transaction tax, stamp duty, GST and SEBI turnover fees which the broker collects. All such costs are mentioned in your contract note. Also, check that the price in the contract note is the same as the price you've been told.
Keep a positive risk-return trade-off
The risk-return trade-off is all about how you set your risk and return levels. For instance, 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.
Keep a positive risk-return trade-off
The risk-return trade-off is all about how you set your risk and return levels. For instance, if you are buying a stock with 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, keep checking the profits you are making against the costs that are debited.
Protect your capital
Your foremost goal should be to preserve your capital. You may or may not be able to amass huge profits, but you shouldn't lose your original capital. Whether you have a trading account or a Demat account, your primary focus should be to protect your capital. Set capital loss limits for your short-term trades and your long-term investments. No investor trades with infinite capital. Hence, protecting your capital forms the core of equity markets.
Conclusion
Trading is often about striking a balance between being too optimistic and too careful. It is important to have a long-term view and not fall for tips that promise overnight success. Equities have a proven track record of creating wealth in the long run. Using stop-loss and self-research can help you have a better trading experience.