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Start early
Investing is easy once you know how. That’s why starting early gives you an extra
edge, to learn from mistakes and experiment with various investment techniques and
asset classes. As you grow older, you can take limited risks with equities and would
prefer to invest in debt too.
Also, every year that you postpone investing towards retirement, the annual savings
you need to make to reach your financial goal will keep on rising. For instance, to get
Rs 10 lakh at the end of 20 years, if you start now you will need to invest Rs 13,879
annually but if you start 10 years later, the annual investment will shoot up to Rs
56,984.
Know yourself
Invest in shares or mutual funds based on your needs and after doing proper
homework. Don't buy something because your neighbour believes he has a winner on
hand, or your broker is issuing a big buy report on a stock.
Carefully choose securities that fit your profile. It is important to relate the risk
perceived in a given security not only to returns, but also to your attitude towards risk.
It is important to understand your emotions towards money and comfort levels with
risk. For instance, what would be your reaction if your stock investments plummet by
35 per cent in a month? How would that affect your medium term or long term plans?
Time marches on
Time can dramatically enhance the value of your starting capital through the magic of
compounding. At 10 per cent annually, the annual incremental capital accumulation on
a Rs 10,000 investment is Rs 1,000 in the first year, is over Rs 2,300 by the 10th year,
and just under Rs 10,000 by the 25th year. After 25 years, the total value of the initial
Rs 10,000 is Rs 108,000, a ten-fold increase in value. Give your investment all the
benefit of time that you can afford. Choosing an investment plan that automatically
reinvests your dividends and interest is also a way to benefit from the power of
compounding.
Food is tasteless without spices. While one may manage a few meals without them, it is
difficult to continue doing it day after day.
Something similar applies to our investing too. If we invest for long-term whether in debt
or equity; if we have to keep patience and see our investments grow with time; if we don't
do something actively; we tend to get bored. In fact we may even end up doing
something foolish, if the wait becomes frustrating.
So we need to add a bit of spice to keep our interest going in building a long-term
portfolio and wealth. Therefore, for that enjoyment and kick, one can look to doing some
day trading.
But remember - just a little bit. Too much of spice makes the food unpalatable. Moreover,
you cannot survive only on spices. But before, we jump into day trading here are a few
guidelines, which may prove useful.
Make sure that you do not allocate more than 3-5 per cent of your equity corpus for day
trading. This is a high risk strategy and so even if one were to lose all money it will not
hurt the overall financial situation. Yes the loss will pinch for some time, but you will get
over the pain shortly. Moreover, it will enable you to come back and try again.
But these are mere technological tools which only facilitate easier availability of data and
execution of trades. We have to learn to interpret that data correctly and convert it into
meaningful information. Easy availability of data does not make everyone a genius. And
those tickers can be very tempting like chocolates. Have self-control to a them.
Educate yourself:
It is a must that you understand all lingo of day trading, futures, call option, put option,
delta, stop loss trigger among others. You need to be familiar with all such terms as you
will come across these in your day trading. This will help to understand what experts are
saying.
You must also be aware of the economic situation to take a proper view on the market
and stocks. How will oil prices impact the market? What effect interest rates will have on
the stocks you want to trade in? For example, rise in interest rates may have negative
impact on capital intensive companies, which depend on a lot of debt. But may be good
for cash-surplus IT companies.
Choose large cap stocks which have high trading volumes. You don't want to get stuck
with an illiquid stock. Moreover, such stocks will have good amount of technical
information. Try to predict the general direction instead of trying to hit tops and bottoms.
Keep a track of all your trades and analyse them. Over a period time you will be able to
pick up useful trends.
The main reason why people lose money in day trading is because they are averse to
making losses. If you have taken a wrong call or the market is not going as per your
expectation, be very sure to book losses. Do not live on the hope that the market will turn
around.
In fact, even before you make an investment, first decide at what loss you will exit. Stop
loss pricing is the key to becoming a successful day trader. Always focus on limiting your
losses, not maximizing your profits. Never add to a losing position. It is a prescription for
disaster.
Similarly, don't be greedy. Book profits at regular intervals. A number of small gains is a
more realistic strategy than going in for one to two big kills. Markets, in the short-term,
are never logical, so don't try to assume anything. Flow with the market. Stick to the
objective rules of profit/loss booking.
Discipline and emotional balance is critical to success. Profits should not make you over-
confident nor should the losses intimidate you. No two people with same set of stocks
and information will make same amount of money. It is their mental framework, which
determines success or failure.
Do not overtrade:
One of the common mistakes people make in futures and options is overtrading because
these markets work on margins, rather than paying the full trade value. Therefore, don't
be lulled into complacency by the low margins. Make sure that your total trade value is
within your financial means.
Also, day trading doesn't mean you have to trade every day. Even two to three trades in a
month may be more than sufficient. Trading opportunities don't happen everyday, so bide
your time. Even if you miss some of them, don't rue. Markets are not going anywhere.
You will get your chance sooner or later.
Further, concentrate on just two or three scrips at the most to make trading more
manageable. Moreover, over time you will get a feel of these scrips, which will help you
to trade better.
A word of caution: