Precautions to be taken while trading in stock markets


Are you trading or wish to trade in the stock market? Did you take into account any precautions before jumping into the stock market? If not, you should make sure that you follow the precautions mentioned in this article. Otherwise, you should be ready to lose your hard earned money.

Introduction

Everyone wants to make some quick money and to do that one of the paths they choose is stock market. Many people come to the stock market hoping that they can make money in quick time, but only few will succeed in that. The success to failure ratio is very low in the stock market. So, you should make sure that you don't end up in the list of failed chunk. In order to succeed in the stock market, you have to stick to your plans and should never deviate from it.

What safeguards must be taken into account ?

The following precautions must be kept in your mind while trading in the stock market.

Timing the market is not easy

This is because it is very difficult to time the market even for market experts. So, you should concentrate more on individual stocks rather than concentrating on stock market indices.

Over trading should be avoided

Over trading results in more brokerages and less profits. You need not be in hurry to make a transaction. Take your position only after deciding how much profit you want and if the assessment is missed where to put your stop loss. You can protect yourself from over trading if you have a wrap account in which brokerage is charged at a flat rate rather than on every transaction.

It is a myth that you can buy at lows and sell at highs

You should not trade by looking at the 52-week high and 52-week low values but trade according to the trends. It is a myth that you can buy a stock when it is at its lowest value and sell that stock when it is at its highest value. Don't trade heavily with less capital by the use of margin trading.

You should know your risk to reward ratio

Before jumping into trading, assess your risk to reward ratio and trade according to that. If you do that you can control your emotions.

You should not make an exit or entry before the stop loss is triggered

Sometimes, greed and fear will make us to act in different way even if we trade using stop loss techniques. If you have already decided your entry and exit points, don't try to change them. Do slight changes only if it is necessary.

It is good to stick to the basics

Give preference to charts rather than emotions. Give some time to learn the basics on how to read the charts. Give some time to go through some information about the company before you start trading in that. You have to do technical analysis of the stock before you start trading in it. It is always better to trade a stock that has strong fundamentals. This is because fundamentally strong stocks won't fall drastically even if something goes wrong in the stock market.

Don't try to lose gained money

If you gained some profit from a successful trade, don't be of the opinion that you can lose some of the gained money in some other trade. You have to trade according to a plan and not according to greed or fear.

You should be prepared to lose some money if decisions go wrong

People hesitate to book losses even if they put stop loss triggers. After losing some more money, they will think of retaining that stock for some more time. Sometimes, the stock may not return to the value that was previously thought out. This creates a long term attachment of that stock.

You should be ready to book profits after targets are achieved

Selling time is more important than buying time. It is very difficult to sell a stock that is already in profits. Even after the target is achieved, people will try to retain that stock hoping that it will move further. But if the trend reverses, you will lose already gained profits. So, it is better to exit the stock if the target is achieved and wait for re-entry into the stock after it corrects. It is not a good idea to balance out old losses by giving more time to profitable stocks.

You should not get carried away with market experts

You have to analyze on your own even if some expert suggests for a particular stock. Even some experts are biased towards some particular stocks. So you should not fall in their trap.

Try to be in the winning side

You have to remember that people losing in the stock markets is far greater than people gaining from the stock markets. Those, who are gaining from stock markets, gain in huge amounts. This is because they control their emotions to a greater extent and they work according to their plans.


Related Articles

Procedures For Starting An Online Trading Account

The demand of online trading is increasing in the share market. This article provides all the necessary information with regards to online trading account. It also provides procedures for online trading account. This article also introduces two different types of online trading.

How to do commodity trading in India.

Want to earn some extra money by trading in commodities? The basics of commodity trading with the ways to trade is explained in this article. Information on various platforms by which the trading is done is also given.The brokers with whom the account can be opened and the trading can be started are also listed. In a very lucid way, the trading techniques have been explained.

Basic Stock trading tips

This article gives some basic stock trading tips and how to have a good trade in turbulent market.

More articles: trading

Comments

Author: Pravat Kumar Das28 Feb 2015 Member Level: Gold   Points : 6

There are some Golden rules which need to be followed by specially by new traders ( beginners) , as until unless you spent some time and gain experience about market never ever try to implement any new strategy and do not try to make money by over night.

When ever you are planning to start investment in share market ( never ever think about how traders are making money) just keep patience and start from investment by buying shares.

Do not try to understand what are derivatives, how much exposure given by your broker, because it will create Greed ness in you to become rich in quick period of time and will divert your minds from the core objective of learning.
Always start share investment from your own money, ( that must be your surplus) , then trade with in your margin only and should be stick with A category scripts at initial days and avoid high beta stocks.
Learn to book partial profit or to use stop loss at right level.
Then only you will get succeed. Never run behind the news trading as it might affect for some days and again the price will bounce back.
DO not trade in derivatives and options until unless you earn some money in equity investment.
When ever you make some profit either withdraw or reinvest that money to buy some A category scripts like SBI, TCS or Maruti etc.

Author: Arti Singh28 Feb 2015 Member Level: Gold   Points : 3

It is a wonderful article giving the details of the stock market and the risks involved.

If you are new to the stock market, make sure that you always deal with the registered broker and do not deal with the unregistered negotiators. Always make sure to get a written documentation or contract of the transactions that you plan to make.

A proper study of the stock market is very important by the investor. An investor should be aware of the risks involved and he should be tolerant enough to face the risks and results.

Be careful before investing in a company you have never heard of. Spend time finding and checking the facts and details of the company.

Do not get tempted by the misleading advertisements that claim to give high returns in less time.

Be cautious about stocks which show an unexpected shoot in price.

Proper understanding of the stock market comes with experience. However, above mentioned points will help a new investor to invest in the stock market.

Author: Bhuvan04 Mar 2015 Member Level: Gold   Points : 0

Pravat Kumar Das and Arti Singh, thank you very much for adding more value to the article through your contributions.

Author: DHRUBA01 Apr 2015 Member Level: Gold   Points : 3

Hi
Stock Market trading is not a simple one, one should acquire the details knowledge about various technique of operation as well as the selection of stock in which to trade keeping in mind the following basic concept for reducing the risk of incurring losses:
I. Interest rate risk: This arises due to variability in the interest rates from time to time. A changes in the interest rates establishes an inverse relationship in the price of the security i.e. price of securities trends to move inversely with change in rate of interest. Long term securities shows greater variability in compare to short term securities by this risk.
II. Purchasing power risk: It is also known as inflation risk and the inflation affect the purchasing power adversely. Inflation rates vary over time and changes unexpectedly causing erosion in the value of real return and expected return. Thus purchasing power risk is more in inflationary conditions especially in respect of bond and fixed income securities. It is not desirable to invest in such securities during inflationary situations. Purchasing power risk is however less in flexible income securities like equity shares or common stock where rise in dividend income off-sets increase in the rate of inflation and provides advantage of capital gain.

III. Business risk: Business risk arises from sale and purchase of securities affected by business cycles, technological changes etc. Business cycles affect all types of securities viz. there is cheerful movement in boom due to bullish trend in stock price where as bearish trend in depression brings down fall in the prices of all types of securities. Therefore securities bearing flexible income affected more than the fixed rated securities during depression due to decline in their market price.

IV. Financial Risk: This arises due to changes in the capital structure of the company. It is also known as leveraged risk and expressed in the terms of debt-equity ratio. Excess of debt over equity in the capital structure of a company indicates that the company is highly geared even if the per capital earnings(EPS) of such company may be more. Because highly dependence on borrowings exposes to the risk of winding up for its inability to honor its commitments towards lenders and creditors. So the investors should be aware of this risk while trading.
Thanks for such a knowledgeable Resource.

Author: Partha K.09 Oct 2015 Member Level: Platinum   Points : 2

Really a very good article. However, I would only add that generally, trading should be discouraged. Most of the people lose money in intra-day trading. People must learn and then invest for long-term.

For retail investors, mutual fund is a much better medium for creation of wealth because mutual fund invests in stock market and bond market under efficient fund managers who have access to latest information about market and latest software for analyzing stocks.

Author: sasikanth02 Nov 2015 Member Level: Silver   Points : 2

Yes, stock trading is really a high risk game. It is a simple and easiest way to lose money in less time. Though share market is also a potential area to earn money but you won't be able to earn money in that without knowledge. This is a really good article regarding share market. As a beginner I could learn many things.

Author: Purna Prasad Sharma17 Mar 2016 Member Level: Silver   Points : 1

One important factor to note: Basically most of us invest in stock markets through a broker. So, be very careful while selecting a broker and avoid opening account online because without doing investigation of these things, if someone does invest, then he/she may have to suffer loss due to broker's terms and conditions & hidden charges.

Author: Partha K.26 Mar 2016 Member Level: Platinum   Points : 4

I re-iterate my earlier views that a common investor should invest in equity mutual funds instead of direct investing in stocks. However, for direct investing in stocks, the following criteria must be taken into account for selection of specific stocks:-

(a) The return on capital employed (ROCE) that a company has delivered and is expected to deliver in the future. The more durable the high return on capital, and the greater it is than it's cost of capital, the stronger economic returns it will deliver to shareholders, and likely the stronger its economic moat and business model.

(b) The competitive position of the business and the attractiveness of the business model (this is also reflected in the financials via the ROCE, but is worth having a subjective view).

(c) The growth opportunities the company has and the returns on those new investments. Companies that have multiple profitable growth opportunities where free cash can be deployed are worth more.

(d) The ratio of the company's intrinsic value (the DCF of free cash to the firm) and the current market capitalization. This is a shortcut method to know whether the stock is attractively priced, or not.

Author: Bhuvan26 Mar 2016 Member Level: Gold   Points : 0

Partha sir, thanks for adding more value to the article. The suggestions made by you, are very much useful for value investors, who do fundamental analysis of stocks for investing in the long term.

Author: Swagatika Pattanaik20 Jul 2016 Member Level: Gold   Points : 7

Good informative articles for beginners (who are interested to trade ) as well as for traders.
I would like to summarize, if you are interested to start a career either part time or full time in share trading, you should be aware about lot of things. This involves risk and so you should be mentally prepared for facing certain amount of loss.
To get success follow these rules while share trading-
First task of every trader is to start learning and gaining as much knowledge about share trading from various sources like reading books or articles mentioned on internet, watching business news channel, reading financial news paper and magazines etc.
Second task is to open a trading account with a broker who will charge you less as compared to other brokers as well as will provide better service and should be near by your home.
Then trade smartly with a very small amount so that if due to any mistake there is a lose, then that amount should not hamper your regular life.
Always do paper trading for a week on particular scrip before starting real trading with your money.
Book partial profit and use stop loss at proper levels to avoid bigger loss at a time. Do not invest whole of your margin money at a time. Do not average your position until you find a good support or resistance level. Do partial profit withdraw.
On every Saturday (trading holiday), check your trade details to get the real experience about your knowledge and mistakes if any.

Author: Neeru Bhatt22 Sep 2017 Member Level: Gold   Points : 2

Very interesting and useful article. In share market, many times it is seen that though people are getting a good profit but they do not sell and in their greed wait for those 'high' moments which never come. If these greed factors are taken care of, one can be a prudent investor in share market.

Author: Umesh21 Oct 2017 Member Level: Diamond   Points : 4

A nice article elaborating some safeguards one must take while playing in the market.

Share market is not the cup of tea of every one. There are times when it is smoothly rising and every one joins the 'buy spree'. Suddenly one day the market crashes due to of course various political and financial reasons. People become restless and panicky and try to sell all of their holdings which adds fuel to fire and market nosedives. This situation also can come due to fraudulent practices by some big brokers. People burn their fingers and refrain from the markets either completely or for some time till the wounds are healed.

The question is how many times such a thing happen. In my memory I have seen this happening twice. The timing of second one only I can recollect and was sometime during 1994-1995. The main culprit at that time was the broker - Harsad Mehta. These are not the regular events but when they happen they eat away a lot of money from gullible investors.

Even if we exclude these events there are other concerns equally frightening. There are some companies whose shares rise but after some time they become stagnant and during bear cycles they are hammered down to their lowest and then they remain their for substantial time reducing the ROI to the investor considerably.

I have no intention to discourage people to invest in shares but these are the things which happen in share market and accordingly we should make our investment portfolio.

Author: Sheo Shankar Jha24 Sep 2018 Member Level: Diamond   Points : 6

The stock market offers the investors some golden opportunities where they can make substantial bucks, however, to achieve the same, the investors should be familiar with the fundamentals of the companies being invested in and its track performance for the last five years is to be evaluated. Generally, it is considered that Blue chips, Pharma and Healthcare companies are the best platforms where the returns would be substantial, but such decisions may be misleading by glancing over the results of a few reputed companies.

However, it would be better for the investors if the investments are made in different umbrellas instead of choosing a single one and the money being invested is not the borrowed one but is from the surplus generation of money by way of savings or a part of arrears received as a result of a promotion. The investors should make some strategies with respect to different portfolios and the duration of time offering them lucrative returns within the the chosen period.

Instead of being agitated with the rumors, it would be better to have some reliable financial consultants who can offer you timely help in redemption with some handsome return.
The author has furnished valuable tips on how the investment can be safeguarded in the volatile share market.

Author: Umesh28 Sep 2018 Member Level: Diamond   Points : 4

It is always advisable that one should be cautious and careful while investing in the share market. It is a fact that even the wisest of us are sometimes losing in this game. The reason is very simple that there are certain circumstances which cannot be predicted but once they come they affect the performance of a particular company in particular and other companies, in the similar business, in general.

So share market is always susceptible to hidden risks which lurk out of nowhere and affect the worth of a particular share adversely.

It does not mean that we should be so fearful of these factors that we do not invest in the market. There are some rules of the thumb which help us in investing prudently. For example, investing only in A group or Blue Chip shares for a long time is a good strategy. Many investors who do not want to bother for day to day variations in share market follow this type of strategy.

Patience is the key to success in the share market.



  • Do not include your name, "with regards" etc in the comment. Write detailed comment, relevant to the topic.
  • No HTML formatting and links to other web sites are allowed.
  • This is a strictly moderated site. Absolutely no spam allowed.
  • Name:
    Email: