Principles of Trading & Investing

Principles of Trading & Investing In our interactions with individuals from different geographies and demographics – one common question that has often emerged is – How should one really trade or invest in the stock markets to succeed? What principles or rules should be followed? One of the biggest markets to make money is the capital market. Across the globe, trillions of dollars of stocks, currencies and commodities are traded. How to invest and trade in the Stock Market is the biggest question that haunts not only the amateurs but also the professionals. How to pick stocks or how to analyse the stock market, what method to use –  whether the stock market technical analysis is appropriate or fundamental analysis is more appropriate. In this article, we’ve tried to answer these basic questions on how to invest in the stock markets and make money! Both trading and investing are altogether different concepts having a different set of rules. Trading requires the generation of cash flows from the market at regular intervals and investing requires pumping of surplus cash flows into the markets for long term capital appreciation. In order to be successful one needs to decide at the threshold whether one is an investor or a trader. Focus on the one is the key to long term survival and wealth creation.

Principles for Investing:

  1. Invest in sound companies having a decent track record, growing consistently say 15% plus, generating positive returns for the shareholders (ROE) say 20% plus having nominal or no debts with good corporate governance catering to the needs of the end consumers. The philosophies of great investors also stress the importance of investing in sound companies rather than betting on hopes or turn around companies. Samco Stock Rating explains in detail how to pick a wealth-creating stock for investments. Often people do not have access to this data and hence are unable to arrive at a decision. In order to simplify that, we at SAMCO have built a Data Bank with all the above information available at a single click. This is available for all clients at no additional costs.
  2. Invest in a well-diversified portfolio of 10 to 15 stocks to effectively manage stock-specific risks at the portfolio level.
  3. Invest when markets are in a panic, these are the best times to invest in the long term, keep patience and the fruits of wealth creation will come naturally.

Principles for Trading:

  1. Follow the markets, chase the price, let profits run and cut the losses short, have a diversified portfolio of securities across different markets eg stocks and commodities for consistent risk-adjusted returns.
  2. Stick to the strategy that suits one’s psychological profile and have the discipline to stay with it even during periods of whipsaw losses. The strategy must be thoroughly back-tested before being implemented.
  3. One should risk not more than 1% of the trading capital on any single trade. Ideally one should have 4 to 5 open positions in diversified markets cum diversified securities. Samco Risk Adviser helps to effectively manage risks.
  4. Control over one’s emotion of greed and fear and the ability to manage risk by not overtrading but taking the risk as per one’s own pre-defined risk management parameters is the real key to success in trading.
  5. Savings in trading costs is extremely important as trading cost eats way a chunk of profits for an active trader. These high costs of traditional brokers who charge brokerage as a percentage on turnover can be substantially reduced by executing buy and sell transactions with a discount broker who charges a flat fee of Rs 20/- irrespective of how large the order is placed. Samco is one of the leading discount brokers in India.
Conclusion: Just like any other game of skill, one needs to practice and perfect the art of trading or investing before having any meaningful success. Both have diametrically different sets of principles for amassing wealth and therefore it is all the more important to decide at the very beginning if one wants to invest or trade in the markets. Whatever one chooses trading or investing, being a part of the financial market is very rewarding. Immense wealth can be made by trading as well as by investing. The probability of making money is equally stacked in favour of both trader and investor but how effectively one follows the rules with discipline is the real key to financial fortunes. To start your investing or trading with the best discount broker then Samco is the right place for you!

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