Must know things before trading equities
You are in the equity market because you want to create long term wealth. That should be your approach. If you get into an equity investment hoping to become a millionaire overnight, you are likely to be disappointed. Investing in shares is not something that you can do as a hobby. It is along drawn and grinding process. You must know the various types of equity shares and also about the pros and cons of equity trading. Here is a quick primer on what you necessarily must know before starting your journey in the world of equity trading.
7 things to know before you trade in equities
Actually, there are a lot of things to know about equities before you start trading, but here are the seven most important things you must know.
- Equity investing is for the long term and make no mistake about that. You can occasionally chance upon big money in a short span of time, but that is an exception to the rule than the rule. Whether you invest in equity for the long term or trade for the short term, you must be clear on that. For long term investors, the essential qualities are patience, perseverance and the ability to hold on. For traders, the most important thing is the ability to manage risk and if you can do that, profits will follow.
- A diversified portfolio of equities has always done better than other asset classes. That has been proven empirically that if you hold a diversified portfolio of equities for a period of 6-8 years and more, the chances of being profitable are very high and there is a high probability that you can do better than other asset classes. Equity shares offer you a wide variety of sectors, themes, capitalizations etc. Hence there is automatic diversification built into stock trading.
- As a trader or investor in equities, stop losses, profit targets, capital protection and opportunities are the 4 pillars. You must always look for new opportunities since it is hard to make money in ideas that everyone is chasing. Never trade without stop losses as you need to cut positions that go against you. Booked profits are always better than book profits so keep profit targets and cash out. Protect your capital from too much depletion so set strict limits.
- What are the essentials for trading and investing. You need a trading account with a broker and a demat account to hold shares. Ideally, activate online trading so you can put orders either through the internet platform or the mobile app platform. Online trading is a lot more transparent and efficient, so make the best of it. Ensure that your trading account, demat account and bank account are linked for seamless movement of funds and shares.
- High risk investing and IPOs are not a free ticket to profits. In fact, both can often be the exact opposite. Not all IPOs do well and in India, digital IPOs and Insurance IPOs have been among the worst performers. Also, taking on high risk in equities does not mean you get high returns. It is the other way round. Higher returns need higher calculated risks. But just taking on risk does not assure higher returns.
- Do your homework and do it thoroughly before investing, since it is your hard earned money after all. Before investing take some to time to study the price trends, the volumes and the ownership pattern. Check for basic hygiene factors like P/E ratio, P/BV ratio and dividend yield. Before putting money, understand what the business model is, what are its profitability triggers and how the industry is shaping up. That is a good starting point. This basic research can help you avoid a lot of fly-by-night stocks.
- Finally, understand the process flow of online trading. You must always deal only through SEBI registered brokers and transact through cheques or through online banking. Let there be an audit trail. Once you buy or sell a stock, check the contract note thoroughly in the evening. By T+2 day ensure that the stock is either credited or debited to your demat account and funds must come into your bank account within 2 days of sale of shares. Remember that equity profits are taxable and losses can be adjusted against future profits. So maintain detailed records and make sure to pay your taxes and file tax returns on time.