10 trading secrets every investor should know

resr 5paisa Research Team

Last Updated: 7th September 2023 - 05:01 pm

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Rahul began trading in the stock market at the age of 16 after he learned about his father earning a huge profit in one of his investments. He had a personal savings of Rs.10,000 and invested it in an IPO with his father through his demat account. The 10,000 he invested became Rs.20,000 in just six months, and he opened his own demat account at the age of 18 after he had accumulated Rs.40,000 worth of savings to invest.

Without having a good knowledge about the market and no real experience, he incurred huge losses and eventually lost a major part of his 40,000 capital. When he took a step back to analyze what went wrong, he came up with ten trading secrets which helped him invest in the right places and eventually increased the value of his portfolio from almost zero to a whopping 65 lakhs.

Passive indexing is the way to go

Most beginner investors are of the view that they have to make a quick and huge profit through the money invested as soon as possible. So did I when I first started investing. But the best way you can build wealth is through periodically investing your money in an index fund. An aggressive approach towards investing will always lead to a loss. As the great Warren Buffet said, ‘It is not necessary to do extraordinary things to get extraordinary results. By periodically investing in an index fund, the know-nothing investor can outperform most investment professionals.’

Your emotions are your worst enemy

There are actual books written just to make you understand that your sentiments can prove to be your worst enemy during the investment process. People tend to attach themselves with stocks that were given to them by their relatives or if they are of personal significance to a person. What Rahul did wrong was that he purchased the stocks of the same company in which his father invested just because of his emotions, and thus incurred a huge loss as a result. Always go with the actual analysis of the investment and keep your emotions far away from your investments.

You need a stockbroker

“I know everything about the stock market; I don’t need a stockbroker” Is one of the main reasons for a beginner investor to incur massive losses. You have to understand that the market is not as easy as you think and requires a basic understanding of the different factors that influence the price of the shares. You will need a stockbroker to guide you through the investment process and help you understand the basics of the market; then only you can earn profits on your investments.

Taxes and trading costs can eat into your profits

Even if you manage to make a profit on your investment, you will be shocked to see the reduction in this amount due to taxes and the commission of your stockbroker. These costs of investment must be primarily considered by an investor before he/she starts trading and reasonable efforts should be made to lower these costs. One of the best things you can do is to hire a broker who charges a flat brokerage fee rather than a commission. You can always consult your broker for other taxes lowering methods to increase your profits in the share market.

All it takes is just one bad decision

It doesn’t matter how experienced you are or how many good decisions you have taken in your investment career. All it will take to destroy your whole portfolio is one wrong decision regarding an investment. You must always thoroughly check the investment and the background of the company. Analyze its balance sheet, income statement, cash flow statement, etc. to get an idea about the company. If you think the company is profitable enough, then only you should decide to invest.

Taking advice from people is not a good idea

At times, it can be tough to pass on an investment after hearing numerous praises from someone about the investment being the “best.” Advertisements on social media or in magazines about an investment that can earn you interest over 11% are nothing but fake. If they know about investments providing returns of 11%, why aren't they billionaires themselves? You must yourself figure out what is right for you and should distance yourself from people providing you with unnecessary advice.

Don’t underestimate the power of compounding

Let's assume that you invested Rs.10,00,000 in the stocks of a company for ten years with the interest rate being 10%. You will get a return of Rs.25,93,742 after ten years, and if you retain the stocks for 20 years, this amount will become Rs.67,27,500. This is the power of compounding. The longer you invest, the more money you get in the end. Compounding makes a big difference when you think long term as you can build your wealth over time by doing nothing.

Always put a stop loss

When you put a stop loss at a certain price level of your investment, your broker automatically sells the investment when the price falls below the stop loss level. Every investor must put a stop loss on every investment to avoid losses which the investor cant afford. A stop loss will allow you to cut your losses by a specific amount and you will not lose all of your money in the market.

Never try to play the market

The market is so volatile that it can prove the predictions of even the professional investors wrong. When you think that the market is down and it has not risen from months, maybe you should consider selling your investments even if it means you have to incur a loss. The motive behind this is to cut your losses further if the market goes down even more. You should never try to play the market as it is a fair possibility that it can prove your predictions wrong.

The lifestyle of a ‘pro’ trader is nothing but a lie

A pro trader advertising himself on yachts or by claiming to buy a sports car worth crores is nothing but false advertising. They claim to provide crash courses about the share market that will help you to become a millionaire in months. There is nothing like a crash course in the share market. If you want to be successful in investing, read investment books or financial articles regularly and avoid these type of fraud advertisements.

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