Trading


Intraday trading techniques

Intraday day trading usually involves fast transactions that end in a single trading day. An investor can make a lot of money in a single day if he is well educated in the nuances of trading and is a judicious investor. But day trading is also a type of business and, as in all businesses, some losses are inevitable.

On the other hand, trading judiciously has also made several people millionaires. It is also one of the most important aspects of the marketplace as it is kept efficient and liquid. Therefore, a beginner in day trading should not expect to start profiting right from the beginning.

Requirements

One should always consider whether the capital available is adequate as also the risk amount that one can afford to lose. A sound knowledge of the market, financial discipline, trade plans and patience are other important aspects that an investor must possess to be a successful day trader. Furthermore, the more a person practices and formulates new strategies, the more the chances of profits maximizing.

Some basic strategies that traders adopt to keep up with intraday trading
Keeping up with the trade trends

A trader buys stocks that are rising or, short-sells them if they are falling. The trader always expects this rising or falling trend of the stocks to continue.

News events

This is the basic and most common strategy traders’ use. They buy stocks according to how their performances are forecast in the news.

Scalping

Traders establish and liquidate a stock’s position very quickly, with transactions occurring within minutes or even seconds.

Range trading

Traders buy stocks at low prices to sell them when prices increase, assuming that once the stocks reach a particular high, they will ultimately decline and continue falling for some time.

Shorting stocks strategy

Traders assume the stocks they have purchased will rise. They also borrow stocks from brokers and sell them hoping their prices will eventually decline so that they can buy them back.

Intraday Trading

Intraday trading is the act of buying and selling a stock within a single trading day. Usually, all positions are closed before the close of trading as the basic aim is basically to be able to profit from the difference between buying and selling prices. The strategy used to make profits is to invest huge sums and capitalize on small price movements of highly liquid stocks.

Understanding trading risks

It is important to understand the risks involved in day trading at the outset. A trader may either make a significant profit or a loss each day because of the nature of financial leverage and the volatile changes that occur in no time. One should be aware of how quickly day trading happens and be always monitoring one’s investments for determining when to exit.

Day trading yields good profits only if conducted in the correct manner, which is by buying and selling shares in a single trading day. This is because when trading for the day ends, any untoward development could emerge and affect the shares negatively.

Choosing stocks

A day trader should first decide which stocks he intends investing and trading in. As the range of stocks for trading is numerous, it is important to choose the one he thinks he can succeed in. Nevertheless, a good choice hinges on a thorough study of the market.

Generally, a day trader looks for two aspects in a stock, its liquidity and volatility. A liquid stock allows a trader to enter and exit it at a good price, while volatility in a stock is just an assessment of the expected daily price range, one in which a day trader operates. More volatility indicates a stock will either yield greater profit or loss.

Another method of deciding on a stock is by looking at its momentum. This is a popular strategy that involves following the latest news reports or by finding strong trends in the stock based on the views of analysts and other investors.

Margin trading

In margin trading, an investor buys stocks without having sufficient capital to do so. Stock exchanges also buy stocks by using an institutionalized method without the required capital through the futures market. For instance, an investor who wants to buy 2000 shares of a company trading at Rs300 a share would need about Rs 6 lakh as capital. However, if he were to buy a futures contract of that company for the same number of shares, he would be paying a margin of only 15%, or Rs 90,000 to get an exposure of Rs 6 lakh.

Under margin trading, a similar method is applied and the number of shares that an investor buys is partly funded by his stockbroker. The proportion of margin funding could range anywhere between 50% and 90%, a lot depending on broker-client relations. The broker procures the funds he credits to an investor from a bank, keeps the shares in his account, and credits to or debits from the investor's funds for profits or losses made, respectively.

Benefits

Margin trading is all about leveraging profits and losses. companies borrowing money for investing in projects, investors can also borrow money and leverage the cash they invest. power of leverage increases every point a stock climbs. If the investment is right, the margin can increase profits significantly. However, what ultimately matters is whether the stock chosen goes up.

Risks

Margin accounts are always risky and everyone is not successful. The same power of leverage can increase losses in the same way it amplifies gains. Further, a broker can dispose the securities if the stock price plunges unlike in cash accounts where there is always a possibility of the stock rebounding.

Margin Call

Used to refer to broker's demanding on an investor using margin to deposit additional money or securities so that the margin account is brought up to the minimum maintenance margin.

Online trading

Investing in the stock market has become relatively easier with the availability of online trading options for those eager to invest, but who do not want to get entangled in the complexities involved. Many investors also lack the time to plan and track their investments. Now, one only needs a computer, an internet connection and a subscription to a 3-in-1 online investing account offered by such service providers.

Benefits of online trading

Online investors can receive plenty of information, analysis and tools that facilitate in making more informed decisions. As all transaction records are online, there is virtually no need of paperwork. One can also invest anytime and from anywhere at one’s own convenience, even during the night. Different asset classes, such as equity shares, mutual funds and initial public offerings (IPOs) are also available for online trading. Information and analyses from some of the best providers can also be availed of, ones that are up-to-date and investor friendly.

Starting up

One should first register for an integrated 3-in-1 online trading account, the three being trading account, for enabling online transactions; an Internet-enabled bank account for transferring money online; and a DEMAT account for depositing shares.

Choosing an account

One should begin by confirming whether a DEMAT account has the backing of a reputed financial institution as a guarantee of additional safety. An investor should then check whether investment in all portfolios is permitted or in only one of them.

An online investor should ensure he is receiving the optimum information and support and that they are easily comprehensible. He should also check the range of products being offered by his service provider. These can be from the basic account to more advanced ones such as trading platforms with live market information.

Other important factors to note are how quickly equity orders are being confirmed, whether the service provider has sound security features installed especially during peak hours, as also the dedication of its customer care cell.

Options trading

A contract which provides a buyer the right, but not the obligation, to buy or sell any common stock or security at a specific price on or before a certain date is called an option in the stock market.

As options are contracts dealing with stocks or securities, they are also called derivatives because their values are derived from underlying assets like stocks or indices.

Example

Assuming a person finds a house he would like buying but knows he will have the necessary amount only after three months. He then negotiates a deal with the owner that provides him an option of buying the house after three months for Rs 2, 000,000. The owner agrees, but for this option, the man has to pay an upfront price of Rs 300, 000.

The same example can be used to explain that a buyer has the right but is not obliged when he buys an option. If that particular house is found to be of immense historical significance and its value jumps to double the price quoted by the owner, the latter cannot ask for a higher price and the buyer makes a substantial profit. Contrarily, if the buyer tours the house before buying it and finds it to be worthless, he is under no obligation to seal the deal with the owner. He, however, loses the Rs 300, 000 price of the option.

Types of options: Calls and Puts

In a call option, the holder gets the right to buy an asset at a certain price within a specified period, while a put option gives the holder the right to sell an asset under similar terms. ‘Call’ buyers hope that the asset’s value will increase considerably before the option expires, whereas buyers of ‘puts’ hope the asset’s value will fall before the option expires.

Share Trading
Why share trading

Many people are eager to try their hand at share trading in the stock markets as it is said to be one of the most lucrative ways of making money. People do not need massive capital to trade in the stock markets unlike floating a new business requires. The time taken to dabble in trading is also relatively low as one gets to deal in ‘fast’ cash that allows for quick liquidation. Furthermore, the tricks of trade to make profits from the stock markets is also easy to learn. However, people have to get their basics absolutely clear or the whole exercise will just be a wastage of both time and money.

Share trading and how to begin

Share trading or the process of buying and selling shares of companies listed on stock exchange(s) (also called bourses) needs careful planning as hasty decisions and assumptions can lead to heavy monetary losses.

A novice should always educate oneself first on how the stock market works by taking up some courses. It is vital to remember that trading in shares is not gambling and one should strive to know which stocks would likely yield good gains. For this, the person has to remain updated about global developments that significantly influences market movements. The Internet is a good source for procuring ample information for a beginner interested in share trading. At the outset, a person should familiarize with the trading terms or jargons used in the stock markets. Trading terms are more or less similar in all bourses globally.

Trading Terms

One should fully understand terms such as stock options and trading, dividends and types of shares, debentures, securities, mutual funds, initial public offerings (IPOs), futures and options, limit order, stop loss, buy and sell quotes, bid and offer prices, booking profit and loss, among others. It will also greatly help a beginner to know about market regulators such as the Securities and Exchange Board of India (SEBI) along with the regulators of other countries.

Trading account: what it is

A trading account is similar to a traditional bank account and holds cash and securities. It is, however, managed by an investment dealer. Traditionally, trading accounts are assumed to hold only stocks, but they can hold cash, foreign cash, securities and various types of investments.

If an investor has several trading accounts because he trades in more than one trading strategy, it is advisable to separate such accounts to avoid confusion. One account may be used to keep his retirement savings, another as a buy-and-hold account for long-term stocks, while still another for transacting his day-trading activities.

Online trading account

This 3-in-1 account integrates a person’s bank account, trading account and Demat account to allow for seamless and convenient transactions. A Demat account is a dematerialized account that investors must open as required by the Securities and Exchange Board of India (SEBI). Under this account, an investor holds shares and securities online, instead of possessing the certificates. A Demat account has to be opened by an investor when he registers with an investment broker and its number is quoted for all transactions in order to facilitate electronic settlements of trades.

Advantages of online trading accounts

An online trading account allows an investor to exercise greater control over trade dynamics. As most online trading accounts provide a free trading platform to scrutinize stock prices, it is not necessary to have the assistance of a broker.

An investor can also easily access his account specifics such as margin available or account balance with an online trading account. This facilitates the investor to adopt a trade strategy as per the changing circumstances of the account. For instance, if an investor finds he is using up trading margin more than necessary, he can constrict his trade criteria and trade only in stocks that have the highest probabilities of rising .

Trading Tips

A person cannot expect to become an expert in share trading right from the day one. It is more of an art that needs exhaustive study, practice as well as failures along the way to become adept in share trading. One can look into a few tips to begin with:

Dividing Risk Capital

: One should divide risk capital or the money one can afford to lose into 10 equal parts. Even if a gain is expected, a person should not invest more than three parts of the capital in a single trade. Keeping spare money for any buying opportunity is another good idea, as a profitable offer may crop up any time.

Choosing stocks and trading plan

One should always choose stocks that have gained reasonably high volumes over a period of time. Further, preparing a trading plan always ensures a successful transaction. One should have a watch list of possible good performing stocks in a day's trading and remain focused on their movement.

Never over trade

A common mistake most traders make is that of over trading, especially after a series of wins. This could gradually put the traders under heavy losses.

Don't expect profit on every trade

Not even the smartest of traders can profit from every trade. Hence, one should remain flexible and acknowledge the mistake of having chosen the wrong side of the trade. One can just exit the trade without changing one’s chosen strategy in the market or it may lead to further losses.

Withdrawing some profits

As long as one is making profits, trading appears to be a dream run. But losses can hit a trader anytime given the volatile nature of the market. Hence, it is wise to withdraw a portion of profits earned if one intends to remain for the long-term in the stock market.

Virtual trading

Virtual trading simulates actual trading on stocks and they are websites that a layman can use to understand how stock trading works. He can practice investing without having to invest real money. This virtual trading platform is also very useful to professional traders because they can test new and different investment strategies without having to fear incurring any monetary loss.

All trading options available

When a person registers at a virtual trading website, he is provided with a fixed amount of virtual currency to trade with. The registering process is very simple and is totally free. Share prices and the points of stock indices such as the Sensex and the Nifty displayed on the site are real while trading is allowed only during actual market hours. Purchasing and selling shares can be done at market prices while one can also place bids that can be executed in the future when the scrip reaches the desired price level.

One can also avail of short selling, or selling a stock without actually possessing it and subsequently buying back at a lower price. This lends the gaming environment a sense of reality. Intraday trading options are also available where the deal has to be squared off within a single day. Short selling is something that can be availed of only in intraday trading. Delivery trade options are also available where a trader takes delivery of stocks and keeps them for a day.

The websites also keep a user informed about the latest news in the share market while helping him analyze the impact as well. A very interesting aspect that reminds the user that he is only playing a game is that he can simply reset his account and restart from the beginning if he finds he has made the wrong moves.

Get Going with Insurance

The Indian Contract Act 1872 defines a contract as an agreement between two or more parties to do or to abstain from doing an act and which is intended to create a legally binding relationship. Insurance is also a legally binding contract as it assumes all essentials of a valid contract:

  • Intention of the parties to the insurance contract is legally approved
  • There is an willful agreement to do an act - while the proposer offers insurance, the insurer accepts insurance
  • Proposal form is the basis of Contract and the consideration is the premium to be paid
  • The Insured is a major with sound mind and bears adequate capacity to enter into contract

Insurance is an equitable transfer of the risk of a loss, from one party to another, in exchange for payment. Under the transaction, the insured pays a premium to the insurer in exchange for the insurer's promise to indemnify the insured in the case of a financial loss. This is done under a contract, called the insurance policy, which forms the basis of any transaction between the two parties.

An Insurance Contract is based on Fair Play that rests on two pillars:

Utmost good faith - is a positive duty to voluntarily disclose, accurately and fully, all facts material to risk being proposed, whether requested or not. It’s required throughout the contract. A breach of utmost good faith happens due to misrepresentation and non-disclosure of material facts. A material fact is any fact or circumstance which influences the mind of a prudent underwriter in fixing the premium in determining whether to take the risk.

Material facts that need not be disclosed include facts of common knowledge, facts of law, facts that can be discovered with reasonable diligence and facts which minimise risk. Section 45 of the Insurance Act, 1938 states that if Material Facts are discovered within two years from the commencement of policy, the insurer can declare the policy null and void. The policy cannot be called in question after 2 years, on the grounds of inaccurate or false statement unless it is proved to be material and fraudulent.

Insurable interest - is the relationship with subject Matter that is recognized by Law and one that gives legal right to a person. It’s pertinent to note that Insurable Interest is not defined by the Insurance Act 1938 but Section 30 of the Indian Contract Act 1872 states that without Insurable interest, a contract is deemed to be a Wagering Contract which is void. Hence, Insurable Interest is a legal pre Requisite.

Now the question arises as to who can have insurable interest in whom. The list is exhaustive:

  • Any person in himself
  • Either spouse in Marriage
  • Creditor on Debtor (To the Extent of Outstanding Mortgage with Interest)
  • Surety on Principal (To the extent of Debt)
  • Partners in business
  • Employer in employees
  • Parents in the Lives of their Minor Children

Indemnity is a fundamental principle of insurance applied to losses that are quantifiable. It’s the monetary compensation that restores the insured’s financial position prior to the loss occurred. In Life Insurance, the insurable interest on own life is unlimited, hence the Principle of indemnity does not apply but it does apply to General Insurance.

It’s pertinent to note that Insurance is meant only for compensating losses and managing risks. It’s not a mechanism to make profits. Precisely why the amount of claim cannot exceed the amount of loss incurred. Talking of Risk management brings us to the question: How does one manage risks in life? There are essentially three ways:

Avoidance - like for instance, you can avoid accidents by practicing safe driving

Retention - You employ own conserved resources to take care of your needs

Transfer - This is where you buy insurance; thereby transferring your risk on the insurer. The purpose may include:

  • Protection of Family interests in case of untimely death
  • Planning for Future Expenses like higher education of children
  • Assured Income Flow in case of Retirement or Disability


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