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Stop loss orders –A way to protect your capital

It is an order placed with a broker to buy or sell once the stock reaches a certain price. A stop loss order works like this: You tell your broker you want a stop loss order at a certain price on the stock. When, and if, the stock hits that price, your stop loss order becomes a market order, which means your broker sells the stock at the best market price available immediately.

The main advantage of a stop loss market order is that it costs nothing to implement. Your regular commission is charged only once the stop-loss price has been reached and the stock must be sold. You can think of it as a free insurance policy. Most importantly, a stop loss allows decision making to be free from any emotional influences. People tend to fall in love with stocks, believing that if they give a stock another chance, it will come around. This causes procrastination and delay, giving the stock yet another chance. In the meantime, the losses may mount wiping out a substantial figure.

Here is an important point to remember:

Be careful where you set your stop loss . If a stock normally fluctuates Rs 10-15, you should’nt set your stop loss too close to that range or it will sell the stock on a normal downswing.

TRAILING STOPS

Another use of this tool is to lock in profits, in which case it is sometimes referred to as a “trailing stop”. A trailing stop loss is fixed at a certain percentage below the current market price of the stock you own. The trailing stop loss percentage depends on how volatile the stock is. If the stock begins to go down and the trailing stop loss gets triggered, you would be able to book your profits in the deal. However, if the stock goes up, you will be bringing the trailing stop loss up to maximize your profits.

For example – you bought shares in , say , Reliance for Rs 1000. The Current market price of the share is Rs 1100 .So you set the trailing stop at, say Rs 1070 so that in the event of stock price crash, your sell is at Rs 1070 booking a profit of Rs 70 per share . Now instead of stock prices coming down, suppose it went up to Rs 1200 .now, you may want to fix the trailing stop at 1160, locking a profit of Rs 160 per share.

VERY USEFUL FOR DERIVATIVE TRADERS

Big bucks are at stake when you enter futures and options. Stop loss orders are particularly useful for traders of derivatives.

MARKET ORDERS AND LIMIT ORDERS

The stop loss order can be stop loss market orders or stop loss limit orders. The difference is that A stop loss limit order is an order to buy a security at no more (or sell at no less) than a specified limit price. This gives the trader some control over the price at which the trade is executed. In a stop loss market order, the trader has no control over the price at which the transaction is executed.

PROS AND CONS

The other positive factor of stop loss orders is that you don’t have to monitor on a daily basis how a stock is performing. This is especially in a situation that prevents you from watching your stocks for an extended period of time.

The disadvantage is that the stop price could be activated by a short-term fluctuation in a stock’s price. The key is picking a stop-loss percentage that allows a stock to fluctuate day to day while preventing as much downside risk as possible.

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4 simple ‘Must follow’ rules for everyone.

Stock market would be a place full of surprises for beginners. Just when you thought you’ve done a good job buying a share, the prices can come down unexpectedly . Or on one fine day , just as you thought everything’s normal, the stock prices may go frenzy recording gains after gains. Everything may seem to be totally illogical to you. Such dramatic moments are part of a stock investor’s life and it is in these situations that people lose control and forget all that they’ve learn’t . Let’s go through 4 situations that’s so common in every investor’s life.

SITUATION 1

As you start investing, you start following economic news more carefully than before and get caught up in daily headlines and assume the stock market is facing a new and unprecedented crisis.Credit crunches, liquidity problems, crashes in particular stock sectors, and other major problems have all rolled through the market before. This doesn’t mean that market won’t react badly to severe problems. However, experienced investors know there is usually an end to any crisis and the market will be back on track.The recent stock market crash and the way market bounced back in two years is an example we all experienced. Many of them sold their positions when the market crashed.

Remember this first Rule- Have patience !If you have bought a share at the right price, Hold it. A big fall will have an equally big rise.

SITUATION 2

The reverse is also true.Imagine this situation- The stock market is soaring up like a rocket. Your broker expects the market to go beyond imaginary levels. The market sentiment appears to be so positive that you’ll find it hard to resist. Everyone who’s investing keeps getting profits everyday. Naive investors watching a bull market run may go crazy looking at the way market moves. As a result, they may not choose their investments wisely and push the prices of hot stocks even higher. Because they are inexperienced, they buy stocks they hear about on television or from friends. That’s the time to be cautious. -

So here’s the second rule- A big rise will have an equally big fall .wait for the fall patiently.

SITUATION 3

You have done your homework, including identifying the entry point for a promising stock. Now you are waiting with anticipation for the price to reach your entry point. Instead of pulling back the price lunges upward.You dont want to miss the bus. You panic, entering an order that is higher than your entry point. Now you have given away some of your potential profit and violated your risk reward of the trade. You even knew it was a mistake to make this trade, yet you let your emotions rule the day. Later it pulls back to your entry point. If only you had be more patient. Now you are faced with another decision: Do you buy more or do you wait to see what happens next?

That brings us to the third rule- There are many fish in the lake and it isn’t necessary to catch every fish that swims by in order to be successful. In fact, it’s only necessary to catch those few that bite.

SITUATION 4

One of the stocks you have been following hits your entry point and you pull the trigger. You invest money in it. Now you wait for the expected to happen. It starts its move up and your positions are in profits.You feel confident and positive. However, according to your analysis it still has more room to run. Then it un-expectantly retreats and falls below your original entry point. You panic and end up selling it off with a small loss. Then the price moves up again and reaches your target, only you are not participating. You’re well thought plan was right, only you let your fear of a loss get in the way of the trade proceeding as expected.

That brings us to our final Rule - Give time for your money to grow.

CONCLUSION

Do your home work , invest and just stick to your plan. keep learning, be disciplined and let the market do the work for you. Exhibiting patience when investing , having patience while your investment grows and keeping your nerves during market crash are integral parts to investing successfully. However, allowing patience to turn into stubbornness is something you must always guard against.

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Don’t let emotions take control

The fear of losing money and the thought of ‘somehow’ making a quick buck before the market closes or trying to square of days losses by trading again and again – these are very common things people start doing once they start investing in shares .Ask any beginner – he’ll admit of doing what i said above or ask any seasoned investor – he would recall doing this mistake in his early days of investing. if you are doing any of these , emotions are taking control over your thoughts and you need some help Because ,these thoughts induces you to act illogically and prevents you from thinking clearly about how an action (buy or sell ) affects your financial position.

Frankly, in the early part of my investing career, at least 15 years back, I’ve gone through all these. I would buy a particular stock after doing some research, totally prepared to hold it for some time , but, as i see the price fluctuate , fear automatically steps in. I keep asking to my self- ‘Did a make a mistake?’ Finally, unable to hold on to my nerves, i would end up exiting that position. Then, at the next moment, i’m in a race to somehow make a quick buck before the market closes- to bring back my capital position to where it started.

So, what’s the remedy?

There are a couple of steps you can take to stop or limit the influence of emotions on your investing success.

USE AN ADVISOR.

A financial advisor can tell you “no” when your emotions want to chase a stock and remind you of your investing objectives. They can help you set your objectives so you have something to measure trades against.

MAKE A PLAN

Make a plan that focuses on your objectives. This is the do-it-yourself version of getting a financial advisor. The plan should address your objectives and any trades should be measured against the plan to see if they meet your objectives or not. Hold up any investment decision to the plan to see if it fits or not. If you are prone to fudging, you might have a spouse, partner or someone else hold the plan and make the call on whether the investment meets the plan’s objectives.

COOL OFF

Wait 24 hours before you make any investment decision that isn’t part of your plan. It’s amazing how different an investment can look after a good night’s sleep – and remember, there will always be another deal

NEVER COMPARE

Never compare your profits with what your friend has made . Your friend may be speculating or he may be experienced than you. Stay cool with the promise that you’ll also make it big one day and keep making fundamentally right moves.

REMEMBER …

The stock market is always there and it keeps giving opportunities every time. If you miss the bus, don’t worry. Wait patiently till the next. What is more important is that – you should be there when the market calls.

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How to practice buying/selling shares in live market.

If you are an online investor, you need to study how to buy and sell stocks from your remote terminal. Apart from that, your online trading platform is a powerful tool and has a lot to offer. You can customize your trading screen , do technical analysis, transfer funds from your bank account to your share trading account, know your exact cash position, check the profit or loss you made – year wise or scrip wise etc. Further, there are shortcuts using mouse and shortcut keys.  But how will you study all this unless you participate in a few trading sessions?

PRACTICE WITH LOW PRICED SHARES

The best way is – open a share trading account with a nominal amount and start buying and selling low priced stocks. They are also called ‘Penny stocks’ in the international market. These stocks which sell for, say, less than a rupee are a best way to start learning practical trading. It does not involve large amounts of money, and you can avoid very high risk at initial stages. Even if you lose, you lose a very small amount.

ADVANTAGE

You can master the method of using your online trading terminal and all it’s features. You also get first hand experience on live technical charts. This is no simple step to be ignored, especially beginners.For example shares of waterbase (code: BSE 523660) are available for less than Rs 5. Learn to buy and sell with 1 or 2 shares, it not going to cost you more than Rs 10 per transaction! The whole cost of mastering your trading screen should be less than Rs 200 ! It’s worth … and it works !

DO NOT TAKE IT AS A SERIOUS BUSINESS

I recommend buying and selling low priced shares only for the purpose of practice. There is a certain section of investors who keep investing in such stocks seriously, trying to make huge returns from such small extremely risky investments.

The disadvantage of investing in low priced shares is that in most of the cases, their fundamentals will be nothing much to talk about.

Secondly, they can have a very thin margin of exchange. This means that when you are looking for a way to sell your stock; you might not be able to find a buyer at its current price. The reason for this stems from the fact that there are usually very low volumes of exchange for many such stocks. Hence, when you need your cash and thus when you try to exit these stocks; you might not be able to find a buyer who is willing to buy at the current price. You may have to lower your price considerably, so that you can sell your stocks and get your cash.

Finally, you can be a victim of a biased recommendation as most of these low priced stock companies will try to influence the investors by using different channels of the media and especially the Internet. In the Internet, you can receive falsely constructed information about such stocks, but in reality you will be losing money since the information will not be true.

Bye for now, have a nice day !

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