Money Manangement


What are the first steps to invest in the Indian stock market?

My answer to What are the first steps to invest in the Indian stock market?

Answer by Ruchir Gupta:

Everybody else might be able to guide you for the first steps, while I dont know if any one else will share what I am going to share, this should be the critical part before you think of investing in any stock.

Be aware of your broker:

  • Go to market as an investor, in case you visit broker office regularly he will try to engage you in intraday and short term trading be aware of it. Never ever buy on Broker recommendation get the ability to identify good stocks your self.

Behave like a stingy fellow:

  • Hesitate to spend money for any stock you are paying, if you bargain for everything else in life then why not for stocks. In the first few months spend time on learning about identifying good stocks.

How to Identify good stocks:

  • Prospectus of top performing mutual funds: See the top performing mutual fund prospectus, the stock held by them, their yearly returns and performance , this could give you the idea where you should invest your money. Old funds are better as they have a more historical data
  • Promoters Holding and Honesty: Good Companies will also be majorly owned by their promoters (as owner why will some one sell his company to outsiders if its making good profit and has enough potential?) Good companies share profits with their share holders in the form of Dividends and Bonus.
  • Numerology: Use simple numerology to know if the stock selected will suit you (in case I write an article on this subject I will update the link here, I am yet testing this on my trades)
  • Check the historical charts: check the historical charts of the stocks. In case you are from India then look and HDFC Bank, Kotak Mahindra Bank, Ajanta Pharma, Eicher Motars, Maruti, Bajaj Auto, M&M. All these stocks go up in 45 degree angle and even in case of any corrections fall less than the market
  • Look for consistent companies: dont invest in companies which report losses or their profit falls dramatically, instead look for companies posting profits on a consistent basis. the Stock price of such companies also become less volatile.
  • Keep away from Debt Companies: Keep away from the companies that have heavy debt or expensive debt (debt taken at higher rate of interest) in their balance sheet. These companies will be paying most of their profits to debtors and then what ever will be left after will be shared with share holders. Many a times nothing is left and shareholders receive their part of losses and hence stock price declines further. Eg: Reliance Communication and all other Anil Ambani Stocks
  • Past performance gives faith: The stocks which have performed it the past will continue to perform, don’t buy cheap stocks because of lesser price

Key Planet and other cycles:

Money Management

  • 70% or more of your saving should have to in safe assets like Fixed Deposits, Bonds, Gilts. After doing that saving only you should turn towards Stocks.
  • Always keep a idle cash 30-40% to buy bargain stocks
  • Divide your money in to different stocks to diversify company risk
  • Divide your money into different sectors to diversify sector risk
  • Fix an a equal amount to invest each month, don’t change that figure.
  • Wait for the right time with cash in hand
  • Only invest the money which you will not need for next 20 years. Minimum investment criteria should be atleast 7 years.

What are the first steps to invest in the Indian stock market?


Strategy and Money Management for Increased Lot Size in NSE

 

The lot sizes have been revised and the small traders who were able to earn by shorting the market will face lack of capital, while bigger players will not get affected by the lot size increase. Now small traders are left with two options-

1. Intraday- Either they will to do intraday in stocks and close positions each day.

2. Positional- For Positional trade they are again left two options.

A. They will only be able to go long or take buy only and not take positional shorts. They will only have one direction to trade, which only Buying. What could be the consequences when Market is going down?

B. They will try to trade the Options , where again the chances of loss have increased coz higher lot size has decreased the liquidity.The Lot size of 8000 in a stock while its options buyer standing @ Rs0.60 and Seller @Rs 0.90 brings in the spread of 30 Paisa and 30 Paisa for 8000 lot size is Rs2,400.

 

Trading could still be done but you need to keep few things in mind which may help you.

 

1. Choose Liquid options, these could be of the stocks like INFY, SBI, Reliance Ind, TCS, or other Large Cap Companies and Nifty and Bank Nifty Options.

2. Choose the Stocks, Indexes that have lower trading margin, obviously there should be some reversal because of which you trade. otherwise lower margin of no use.

3. Lower margin stocks will also help you some times to average.

4. You can also move towards Currency Trading if you are a Technical and Chart trader. (Currency could be Traded in the same NSE trading account). You can also move towards Commodity Futures and even Mini Commodity Futures which require margins less than 10,000.

 


Nifty Future and Option Money Managament

When a trader trades in a Nifty Future with Rs 17,000- 20,000 margin and he has to bring in extra money if some loss occurs. Compare this with a deep in the money Option which is around Rs 400. It will cost you 400*25= Rs 10,000.

 

Count the Advantages now

 

1. Even in the beginning of the month there will be very little time value premium very much equal to futures. so same benefits as in future.
2. Margin will be limited to option value, meaning limited risk.
3. You can sleep well in night
4. In second or third week you can even switch to Rs 200-300 option.
5. In the last week still you can trade in Rs 100 “In the Money” options that will have very little time value.
6. Rs 20,000 Vs 10,000 is a good deal.

 

Disadvantages
1. The liquidity in Deep in the Money options may be less than Futures, However if you are doing a swing trade you should not be bothered.
2. If you were trading in 1 lot of nifty future, keep trading in 1 lot only and save your left over margin to fulfill the next trade, because in case of a loss your capital will reduce and you can make up for next trade with the extra margin.