Meet Mr. X, he had lost around ₹ 10 lacks (₹10,00,000) in the stock market. During the last five years in the stock market, he had applied various techniques, followed many analysts and ended up with a cumulative loss of around ₹ 10 lakh! However, in several instances, he made money, but the profit was too little as compared to the losses occurred. I am dividing his stock market journey into 4 phases. Let’s have a detailed look at each phase and let’s analyze exactly where he went wrong.
In the stock market, blindly following your broker (or friend) may cost you badly. Have you noticed whether you gain or lose, your broker always remains in profit?
You have to pay brokerage for every transaction (buy and sell). Your broker can earn only if you trade. So, it’s obvious that your broker will encourage you to buy and sell frequently.
All of us are concerned to maximize our income. While you are concerned to earn from the stock market, similarly your broker is also concerned about maximizing his income.
Due to this simple fact, maximum broker encourages frequent trading.
Exactly, here the problem arises. The more you trade; the chances of suffering loss will widen and at the same time your broker’s income will keep increasing.
In the latter part of this chapter, I will mention in detail why frequent trading widens the chances of losing money. Big brokerage house often sends stock tips via SMS and email to their clients to encourage trading.
Sub-brokers are pressurized to meet the minimum turnover target.
Sub-brokers can also lose their license if they fail to meet the minimum trading volume. It is the retail investors who are affected the most in this entire process.
You might have also noticed that brokers are always ready to reduce brokerage if you trade frequently in large volumes. This is an indirect encouragement to trade more so that at the end of the day they can gain big, irrespective of your position.
2nd Mistake: Jump To Intraday Trading
Show me a single person who is consistently making money from intraday trading for at least 1-2 years. Throughout the world show me a single billionaire who made his fortune only from day-trading.
You won’t find a single person. You can make money once, twice or thrice but you are bound to lose after that. Generally, the loss is always larger than the profit. Try it yourself. Take day-trading tips from anywhere, from any analysts.
There are many paid stock tips provider who claims 99% success ratio. Follow their tips and trade in intraday and check the result. It may sound bitter but the reality is that not a single market analyst can help you in creating wealth from intraday trading.
Now you may think; if this is the case then why so many people jump into day trading. There are various reasons which I will discuss in detail in the latter part of this chapter.
As of now just note the indirect encouragement from your broker. You have ₹50,000 in the trading account, however, your broker allows you to trade worth 5 lakh (₹5,00,00) in intraday i.e. up to 10 times your original amount. (which is called “Margin Trading”) What will you like to say? Do you want to make money for your broker?
3rd Mistake: Investing in Stocks from Borrowed Money is a Dangerous
Investing in stocks from borrowed money is a dangerous practice unless you have enough expertise on the subject. This practice can exponentially increase your gain as well as multiply your loss.
Almost all sophisticated investors leverage their position. They know risk management, they know when and how much to leverage and above all they have an in-depth understanding of the subject.
Figure out whether you have enough expertise or not. For retail investors, it is better to stay away from a loan against share. During bull-run any investor can do well, but what separates the intelligent investors from the rest is the ability to minimize loss during the market meltdown.
Retail investors tend to go for “loan against shares” during bull-run. After 1-2 years of a good return, you start believing that you have mastered the game and the market will teach you a lesson.
Leveraged position can even create a bankrupt situation during the market fall. So it is always better for retail investors to avoid the same.
4th Mistake: Trading in “Futures and Options”
Trading in “Futures and Options” is the worst ever decision for any retail investor. You can lose your entire life’s savings. Many analysts or stock tips provider will claim that one can earn up to 100% return within a month from “Future” trading.
My question is why they themselves don’t trade? What’s the necessity of selling “tips” when you can earn 100% monthly return from your own analysis? If you can take a bank loan of 10 lakh and earn 100% monthly return then after repaying bank loan you can become a millionaire within 2-3 years.
Now show me a single person, who turned billionaire through “Futures and Options” trading. You won’t find a single person throughout the world. Next time onwards, if any stock tips provider tempts you for “Futures and Options” (F&O) trading, simply mention them the above statement.
Just conduct a Google search, you will find many stock tips providers claiming such extraordinary return from their trading calls while reality says something different. Don’t be get trapped. Stay away from stock tips provider who claims an extraordinary return. Basically, F&O is meant for institutional investors and hedge fund.
They are the one to get benefited from this option. Big companies or high net worth individuals hedge their position using F&O. Future trading is a great option for hedging. Retail investors, who jump in F&O for extraordinary returns will surely end up with lots of disappointment.