Stock Market Trading : Frequently Asked Questions

Trading as a topic is widely spoken about and there are lot of people who have jumped on to the band wagon of “getting rich too quick” & ended up going through tide and realised they’ve lost more money than they make even in their day job. Many of them have the fear of not entering because they are either too conservative or do not understand how things operate for them to learn and try investing stock market. There are however people who go through the tide and mastered the practice, this is basically 10% of the population. For them to succeed there’s a handful who had to lose it.

I remember my barber from a few years ago, we fondly called him Hitler, who always had stock market news on his television, was somehow lured in to trading by someone who pretended to be making quite a lot of money in this process. The ones that are not able to make sufficient money in their regular jobs think this is one of the best ways to make a lot of money in a short period of time and their mind plays sufficiently well to make them dream “RICH”. Hitler had his “aha” moment when one of his stocks made him INR 400 in one stock under a week’s time and he was fully convinced that he was going get settled in his life soon. While he was cutting my hair, he looked at the stocks in the market and those days calls were made to the brokers for investing in stock where Hitler placed his bets on stocks that were going down in price thinking it will come back up, what was missing in him was the ability to understand why the stock is going down and the ability to remain patient. One year fast forward, I found him selling tea outside of a theatre in the night as a 2^nd job because he had lost a lot in the stock market.

There could be questions as to why would you even want to learn the answers from a person who has been in the field for merely six years as against the giants like Warren Buffet or Rakesh Jhunjhunwala, we would still recommend you follow them but the market is flooded with people who boast about some of their profits, hiding behind the failures & the lost money. They are probably the Karan Johar/Sooraj Barjatya (Bollywood directors) version of trading where there’s a hero almost always is the rich one which huge success, this person Mr.Hariharan has seen the ups & downs for a long period of time, and knows what it means to survive in the market, so we bring to you the Bala (Kollywood Director) or the realistic version of stock market trading.

1. What’s the basic of Fundamental and Technical investment?

Fundamental analysis takes into account three types of analysis: Economy, Sector, Company. The top down approach of each in order. You take into consideration the various metrics like GDP, Inflation, Monetary policy, Exchange rates etc to take a view on a stock. 

Technical analysis, on the other hand, is also the top down approach in the same order, but based on historical movement of the share price. It’s about forming a view on a share price basis price, volume, momentum, volatility, pattern, time and sentiment.

2. I have bought a stock at INR 300, now it is trading at INR 240. What should I do?

Get out. The most important aspect of being in stock markets, is to accept when you’re wrong. The price being 20% below your entry price is a clear sign from Mr. Market that you’re on the wrong side, unfortunately. The exit gives you an opportunity to evaluate your options without any basis, and that’s the fundamental of investing/trading.

3. Which is the best source for obtaining company financials & information?

All the companies are required to publish their financials and other core information in their own website, usually found under ‘Investor relations’. In the absence of that, NSE/BSE website would be the ideal place to dig for data. In general, Annual reports are very thorough and carry a lot of info which is not yet translated into numbers. A sneak peek into what’s coming for the company.

4. Which broker to pick for investing in stocks?

Any decent broker would do. All the major banks have solid brokerage arm, and combined with discount brokers like Zerodha and 5Paisa, there are plenty.

5. What is the appropriate amount & time to spend in the researching stocks?

Amount: The general thumb rule is not more than 1% of capital should be exposed in a single transaction. Say, you’ve INR 1 lac capital, it doesn’t mean buy a scrip ‘Reliance’ for INR 1000. The 1% rule applies for the potential loss incurred from the transaction.

An example is needed here: Let’s say the purchase prices is INR 2,000, Stop loss is at INR 1800 (The least you could allow the value of your stock to go down to). That means risk of 200Rs and exposure size is INR 1,000 (1% of INR 1 lac capital), Implying 5units to be bought.

Time: A relative question. Before investing, it’s better to go through at least one year of annual report in detail to identify the opportunity, risks etc. The time isn’t the constraint here: the information needed to be acquired is the deciding factor.

6. Are investments in IPO worthwhile?

IPO’s are always a great way to build up your portfolio. Prior to the decision, look into the market and sector and form a view. A stock in general carries a 40/40/20 weightage towards Market/Sector/Company. If the markets are bearish (moving upwards), and the sector is dwindling, it becomes very difficult for the company to perform not withstanding how good the company/management be.

Quote from Warren Buffet is very relevant here: “Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be a more productive than energy devoted to patching leaks.” “Even the best captain can’t save a sinking ship”.

7. Is investing in small cap more profitable than large cap?

Not necessarily. The market operates in cycles. Also, the general narrative is that Large caps aren’t good for investment and small caps are the multi baggers. However, that isn’t true. If you look at last 5years performance of Reliance, Britannia or Infy, and compare with that of mid cap, these large caps have significantly outperformed almost all of the mid-caps.

8. What are the signs to look out for exit?

Different ways for exit. If you’re investing for, say Jio to play out for Reliance or Electric vehicles to revolutionise the auto market and accordingly take your pick in auto etc, when the theme has played out, you can exit. If you’re hoping for a recovery in a beaten down stock, and accordingly invest, it could be monetary/market sentiment decided. If the investment is for momentum (Quarterly growth is strong), when the growth dips, the exit can be made. So, it depends on the purpose of the investment. Generally, if you’re looking for clues in the market, is when the sentiment is really high, the top is made.

9. How would I know what the right amount of stocks to buy is?

Two ways. 1. Portfolio type. What sort of portfolio are you trying to build and average time frame. Accordingly a % can be decided.                Or

2. The general 1% thumb rule can be used (explained in one of the questions above).

10. If I lose money initially, should I dump the idea of investing and move on?

No. But you can certainly take a break and come back. The stock markets aren’t going anywhere. And the break gives the detachment from the markets and can be used to evaluate and reflect back to find out what went wrong in the first attempt. This would certainly help as learning for the second round of investing.

We hope this article was useful to you. Comment below on the topics you wish to learn about further in this topic.