Avenues for investing in Indian Securities Market: A guide for a retail Investor.

Retail Investors, the new aged investors who have multiplied in number over the past one or two years have an overwhelming effect on the Indian Stock Market. The advancements in the technology world have bought Investing and trading experience to everyone’s fingertips. Nowadays investing in financial markets are as simple as ordering something from Amazon. The way this process has streamlined allows everyone to dive in the world of financial markets. The way technology has made this process Over the Air is one more reason why people find Investing so easy. There was a time, to open a Demat Account one had to go through several hardships, the processes were slow and staggered. Digitalisation of the account opening process was a good sentimental boost compared to the trivial documentation mode. The rippling effect of that was – Massive Amount of Demat Accounts were Opened. A matter of fact that, the number of Trading Accounts have doubled from 3.6 Crore in March 2019 to a whopping 7.7 crore in January 2022.

The drawback of this enormous jump of new age investors in the market was – They were never a part of the greater market cycle. Market Cycle refers to the bull market followed by an alarming correction with pessimism surrounding it. Experiencing a market cycle is extremely important for an Investor/trader. A market cycle may take a year or two to complete. As opposed to this new age of retail investors, they haven’t had the experience of a Market Cycle due to which they might have a setback and loss of capital for that matter. Hence, understanding how markets perform in the uptrend or the downtrend is of utmost importance. We would like to help out the retail about our experience. We have set of seven major points which we think might be some of the mistakes that the new-age investors will commit.

Point One - Don’t just rely on tips

TIPS. This word might be one of the most used term when there’s a group discussion going on about financial markets. Tips refer to a recommendation or an insider news given from an experienced and educated financial expert. Retail Investors often rely on tips from these people. It’s not wrong to hear what experts says or recommend but its fallacious to not do your research on where you are betting. There are multiple ways you can cross verify tips. Not every tip will be profitable. If looking for an investor’s point of view, look for profitable companies. A good company will have growing profits, good revenues, reducing debts and higher dividend yields. There are multiple factors but these might be the key factors and any of them in the opposite way might be a red flag. From a Traders point of view, when trading on tips always stick to an accurate risk management strategy. When you fetch a tip, do ask on what basis is the tip given and once you fetch the reason do cross verify it. Quantity and price management is a noticeable skill here. Avoid stocks which have very less volumes and stocks which have multiple series of circuit movements.

Point Two - Never try to catch the falling knife

There are a certain group of stocks which have been under scrutiny and certain forms of financial strains. These are stocks with very huge volumes and less prices. These are companies with huge prices which depreciated over the past years due some form of irregularities. Investors of new age think, if they buy them in good quantity they can catch hefty returns on them. The thing gets more intense because the financials of the company are just for namesake. Some of these companies often see huge movements on news breaks but the person buying should know that it’s not the value you putting in. Value Investing means good business available for lesser valuations. The retail group are often interested in such stocks whose values have depleted over the past some years, expecting them to turn multi-bagger. The sad thing here is that it doesn’t work that way.

Point Three – Always book your losses first

When investing/trading in markets it’s very common that someday you’ll incur some losses – That’s the way the cookie crumbles. Losses and profits are two sides of same coin. The first loss might be very harmful to the newbie but the passion to never stop keeps the investor going on. This gets us to a very important aspects of booking your losses. You have your levels of stop loss once they hit get out of that trade because once you start trailing the market will make you trail till the time the trade goes null, so always follow a strict policy of booking losses. Booking losses is as important as entry time in a trade. Once a stop loss hits, never try to manipulate with it because you’re breaking your set of instructions which you had developed after sheer hard work and knowledge. Once you alter a stop loss, you’ll have to alter it again and again. It’s a loop of red days but what if you booked all your losses on the first stop loss trigger. Once a trader/investor incurs a loss, his sudden emotional response will be of a revenge trade. Revenge Trading refers to revengeful impulse caused by a losing trade. Revenge Trade might be one of the most common mistakes a retail investor does. Avoiding and forgetting a loss making trade will be the ideal choice.

Point Four - Learn Diversification before Investing

Diversification refers to the process of mixing wide variety of investments instruments to manage risk effectively. Let’s understand this with a wide example - Let’s say that Investor A bought significant stock of a company and parks all of his capital in a tech based company it while investor B buys companies from different sectors like IT, Banking and Realty. Here we have an investor who has parked all his/her capital in one Tech Company while on the other side we have an investor who has aimed at different sectors and different companies. Let’s say that tech stocks are under pressure then investor A will lose significant percentage of his/her capital while Investor B will lose capital but not a whole ton of it because banking and Realty won’t be that hit by the tech fall. The process by which an investor reduces the risk by adding more companies to his/her portfolio is what diversification is all about. Investing has some major core concepts which includes mental stability (patience to see losses), Diversification etc. While diversifying a portfolio, an investor should be cautious about not over-diversifying the portfolio. Once you add more than a certain number of stocks, it becomes very difficult to breakeven on day-to-day basis. Holding multiple sectoral stocks can hamper your growth to your dream portfolio. Hence diversification is of utmost importance when investing a large chunk of money into equity markets. As an investor, you can use multiple investment instruments like Mutual Funds, Bonds, and Commodities etc.

Point Five - Stick to your roots

This might be one of the most important aspects of investing. Understanding markets might be tough but sticking to your rules and investing framework will be way more complex than understanding markets. The market overall in the past of couple of years have been very uncertain and this was time most of the retail investors have got in. The wave of pandemic and rising inflation have made the market tricky and uncertain. In such time of high volatility and quick changing sentiments sticking to your rules and Investment framework. Investment framework is a set of investor defined rules to invest in the markets and fetch hefty returns. Creating an Investment/trading framework differs from person to person based on their risk profile some can risk it all while some are afraid to even take a small bet. Another thing to take care of is Stick to your views. Remember that day on drinks you told your friend that I will never invest in penny stocks – Yes so just stick to that you’re doing the right thing. Sticking to your investment framework just won’t make you a profitable trader it will make and educated and disciplined trader.

Point Six - F&O is the only way you can be poorer || Hedging is the only way you'll be Wealthier

Futures and Options is a different segment of market here traders hold the position from a few seconds to a few week. In this segment there is a minute or no resemblance of fundamentals, technical here are the main deciding factor here. Futures are considered quite stable as they are prices similarly as the stock. Options are the more lethal ones here. Options are highly unstable and exceedingly volatile. The price the trader pays for buying an option is called the premium. The premiums of options can shoot up 300%-500% or even deplete 90-95% on major gap-ups and gap-downs. Majority of the new age traders often take naked positions in them and often loose a huge ton of their capital. Hedging refers to have a long position (Bullish Position) in one segment and countered by a short position (Bearish Position) in another segment. Hedging is a risk management method used by options trader to hedge their risks against non-favouring position. Naked trading is often a retails go to spot to trade. Options are always called leveraged positions because a trader has to buy a certain quantity known as the lot size. Hence these high leveraged positions are often poisonous to your portfolio. Hedging might be the best way you can have a chance to make money in this sect of the market. Hedging doesn’t make you a good trader, it makes you an educated one.

Point Seven - Follow Strict Targets and Stop Losses!

A good Risk Management system is of utmost importance when trading. A good Risk Management System includes – Variable Stop Losses and Targets. Stop Loss is a form of trigger order which is triggered at a certain price point. For Example if you have placed a Stop Loss order of selling Reliance Industries to sell the script at 2500-levels then the software will sell your position once the price is triggered. A 10% Stop Loss on a position less than INR 50,000 is considered healthy. A trailing stop is a type of stop loss which changes with price action. Trailing stop losses are a part of a greater profit making strategy. As compared to stop loss, we also have something called as Targets. Targets are price where the investor/trader thinks that the scripts has been valued appropriately. While stop loss orders are price triggered orders, targets are sentimental levels. Targets are not set on a computer software but are studied and developed in an investor/traders mind. Following your set of targets and stop losses are beneficial to your finances. You can change your stop losses according to the price action but manipulating with stop losses on the pretext of greed would be felonious. In the words of great American Financier Bernard Baruch, “In investing/trading it’s not how much you make but rather how much you don’t lose.”

This brings us to the end of the common mistakes made by new age investors and their solutions. The exponential rise of investors is likely to continue for the next decade and it’s too likely that the retail will dominate it. In the United States of America, 50% of the Adult population invests in stock market because of minimal or null interest rates as compared to India it is just 3% of the Adult Population invests in. With the sudden development of streamline and easy to use B2C trading apps it has helped everyone to capture markets extremely easy. The next 7-10 year of the India Inc. will be the years of the retail investors hence making them caution about all the contingency risk was of utmost importance.

Thanking You!

(“I, Chintan Nirmal Ruparel, confirm that the essay with the title “Avenues for investing in Indian Securities Market: A guide for a retail Investor.” was solely written by myself and no other aid was used and not have been previously published or considered for publication)