Things To Keep In Mind When Start Trading In The Equity Market

Indian equity markets have witnessed a large influx of new Demat account holders in the past few months. Millions of young traders have been attracted to discounted prices. Exploring the world of equities is a right step towards financial growth but if you are also among the first time traders, you should be aware of certain trading rules so as to avoid blunders.

Ensure that online trading is activated on your account

Although having an online trading account is not compulsory since you always call up your broker for the same but having an online account makes trading simple. Online trading is flexible and helps you make a trade remotely. So, it is often advised to get your online account and Demat account activated simultaneously.

Avoid stock tips, rely on your own research

A stock tip that seems too good to be true should be avoided. Most of who offer tips promising overnight-windfall have vested interest. Instead of shortcuts, you should rely on your own research. Get your broker to give you short term and long-term research ideas. You must apply your due diligence before taking up any buy or sell recommendation.

Use stop loss while trading

A stop loss is your insurance against volatility. Use of stop loss can protect you from heavy losses. By limiting capital risks, you can benefit in the long run.

Avoid the herd mentality

Newcomers often fall victim to herd mentality. They often buy stocks just because they are being talked about in the market or because a successful investor has bought them. In the stock markets, it often pays to buy in the midst of fear and sell in the midst of greed.

Different trades in the market have different tax implications

Worrying about taxes on equities is not just for large investors. For instance, if you sell a stock in less than 1 year then it is short term capital gain and is taxed at your peak rate. Intraday traders are speculative trades and they cannot be set off against other delivery trades.

Holding assets for more than 1 year makes equity capital gains tax-free up to Rs 1 lakh per annum. Beyond that, you will have to pay 10% tax without indexation. Therefore, understanding taxes and incorporating it into a strategy can make a big difference to your returns.

Go through the contract note and understand the costs

One of the most important practices before your trade is to go through the contract note and understand the costs. Brokerage is just one of the costs. There are other statutory charges like securities transaction tax, stamp duty, GST and SEBI turnover fees which the broker collects. All such costs are clearly mentioned in your contract note. Besides, check that the price in the contract note is the same as the price confirmed to you.

Keep a positive risk-return trade-off

The risk-return trade-off is all about how you set your risk and return levels. For instance, if you are buying a stock and keeping a stop loss that is 2% lower; your profit target should at least be 6% higher. That will ensure a positive risk-return trade-off of 3:1 on your trade. Also, check the profits you are making against the costs that are debited in your ledger and let that be more than what you would earn on a passive index fund.

Protect your capital

Your foremost goal should be to preserve your capital. You may or may not be able to amass huge profits, but nothing is more painful than losing your original capital. This is something you must never lose sight of. Whether you have a trading account or a Demat account, your primary focus should be to protect your capital. Set capital loss limits for your short-term trades and for your long-term investments. None of us trades with infinite capital and hence protecting your capital forms the core of equity markets.

Conclusion

Trading is often about striking a balance between being too optimistic and too careful. It is important to have a long-term view and not fall for tips that promise overnight success. After all equities have a proven track record of creating wealth in the long run. Using stop-loss and self-research can help you have a fair trading experience.