Article

The ‘right’ way to exit a losing trade

18 Apr 2018

Every trader has his share of bad trades in his portfolio and you do not need all your stocks to be multi-baggers to be successful in the share market. While gains from a stock have no upper limit, the loss from a stock is limited to the value invested in it. Exiting a losing stock is not only a financial loss for a trader, but also an emotional or psychological loss. It is human tendency not to accept losses readily. We have a few recommendations that will help you exit a declining trade.

Let’s take a look

Use stops to restrict your financial losses

Stops are calculated, pre-determined price levels at which the investor chooses to go short or sell his stocks to limit losses. When the stock price hits the stop loss price, a sell order is executed and the stock is automatically sold at that price. Stop loss orders work well as they define the losses beforehand and the loss amount is in the control of the investor. Have a personalized stop loss strategy and use it effectively to limit your losses while investing in stocks.

Keep a check on the stock even after exiting to find a re-entry point

Once you exit a position, keep an eye on it to identify any bullish indication of reversal, which can be a potential re-entry point. Using stops, you might sometimes exit your position because of price volatility. In no time, you may find the prices rising again. However, using proper stops is proven to be effective as it limits your losses in most cases. Analyze the charts, study the candlestick patterns, and re-enter, only, if it coincides with your research and not in hope or revenge. If there is no valid reason to re-enter the trade after the initial exit, walk away and search for new opportunities.

Do not emotionally connect with your stock picks

You should accept your wrong picks and move on rather than lingering onto the stock in the hope of a rebound. You need to monitor and notice the developments around your shares continuously, and if stocks are taking the wrong direction, you will sometimes need to book losses and accept your wrong stock picks. Don’t fall in love with your shares, sell them if the fundamentals do not appear correct and restrict your losses. Booking losses or hedging them at an early stage can help minimize losses.

Accept responsibility and analyze your mistakes and find out where your investment plan can be improved

This will help reduce the chances of the same happening again. Handling trading losses well is a leading characteristic of successful investors. Treat a failure as an opportunity to learn and improve it in your next move. Many opportunities are waiting out there in the market for you to find and grab hold of.

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mutual-fund

Why to Choose Mutual Funds Instead of Directly Investing Into Equities?

Whether to invest in equities or mutual funds is a question that has plagued every investor. As someone who needs the best value for his/her investment should you invest in equity directly or via mutual funds?

Let’s start by first understanding what these two terms ‘equities’ and ‘mutual funds’ stand for-

Equities- Equities generally represent ownership of a company. If you own any equity in a company, you are a part owner of the said company (depending on how much equity you own).

Mutual Funds – It is an investment scheme which is professionally managed by an asset management company. It pools together the resources of a group of people and invests their money in equities, debentures, bonds and other securities.

Why choose mutual funds over equities?

For people who’ve never invested in either stocks or mutual funds, it is hard to know which is better and where to start. Broadly speaking, if you are a novice investor, mutual funds are not only less risky but also way easier to manage. Here are some ways in which investing in mutual funds is beneficial as opposed to investing in equities -

Diversification

Mutual funds provide more diversification as compared to an individual equity stock. When you invest in equity, you are investing in a single company which has its inherent risk. For example, if you invest Rs.20,000 in buying equities of one company, you could face a total loss if that particular company performs poorly in the market.  

If you invest the same amount in mutual funds, it will be invested in different kinds of stocks and financial instruments, high-risk and low-risk both, so you might not face total loss even if one company does poorly.

Scale of Investment and Lower Costs

For an individual investor buying and selling stocks is a difficult task due to its high price. Thus, any gains made from stock appreciation are nullified if the overall trading costs are considered. Comparatively with mutual funds, as the money is pooled from a large number of investors, the cost per individual is lowered.  

Another advantage of mutual funds is that you don’t need to invest large sums of money. Buying equities for a profitable venture needs huge amounts of money, a minimum of few lakhs. With mutual funds, you can start with Rs.1000 and earn profits on that as well.

Convenience

Keeping an eye on the markets everyday is a time-consuming business, especially if you are investing as a side gig. There are people who spend their lives studying the market and still end up sustaining heavy losses. Though investing in mutual funds does not guarantee high returns, it is stress-free and needs less work as compared to investing in equities.

To sum it up

It is important to remember that mutual funds have their own disadvantages as well. Thus, as with any financial decision, educating yourself and understanding the suitability of all the available options is the ideal way to invest. 

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The ‘right’ way to exit a losing trade

18 Apr 2018

Every trader has his share of bad trades in his portfolio and you do not need all your stocks to be multi-baggers to be successful in the share market. While gains from a stock have no upper limit, the loss from a stock is limited to the value invested in it. Exiting a losing stock is not only a financial loss for a trader, but also an emotional or psychological loss. It is human tendency not to accept losses readily. We have a few recommendations that will help you exit a declining trade.

Let’s take a look

Use stops to restrict your financial losses

Stops are calculated, pre-determined price levels at which the investor chooses to go short or sell his stocks to limit losses. When the stock price hits the stop loss price, a sell order is executed and the stock is automatically sold at that price. Stop loss orders work well as they define the losses beforehand and the loss amount is in the control of the investor. Have a personalized stop loss strategy and use it effectively to limit your losses while investing in stocks.

Keep a check on the stock even after exiting to find a re-entry point

Once you exit a position, keep an eye on it to identify any bullish indication of reversal, which can be a potential re-entry point. Using stops, you might sometimes exit your position because of price volatility. In no time, you may find the prices rising again. However, using proper stops is proven to be effective as it limits your losses in most cases. Analyze the charts, study the candlestick patterns, and re-enter, only, if it coincides with your research and not in hope or revenge. If there is no valid reason to re-enter the trade after the initial exit, walk away and search for new opportunities.

Do not emotionally connect with your stock picks

You should accept your wrong picks and move on rather than lingering onto the stock in the hope of a rebound. You need to monitor and notice the developments around your shares continuously, and if stocks are taking the wrong direction, you will sometimes need to book losses and accept your wrong stock picks. Don’t fall in love with your shares, sell them if the fundamentals do not appear correct and restrict your losses. Booking losses or hedging them at an early stage can help minimize losses.

Accept responsibility and analyze your mistakes and find out where your investment plan can be improved

This will help reduce the chances of the same happening again. Handling trading losses well is a leading characteristic of successful investors. Treat a failure as an opportunity to learn and improve it in your next move. Many opportunities are waiting out there in the market for you to find and grab hold of.