Is the Reward enough to the Risk you are taking?
Are you scaring the life out of your transaction you have made in stock market? There are some mistakes if you make in stock market that can create the big trouble for you.
- Position too big, which has been created through future transaction and position is open with high leverage.
- Every time started new strategy every few days.
- No long-term view.
- Actually no idea, not understanding what is driving the market.
- Taking the profit as soon as possible and staying longer with loosing position.
- Listening the views of the people, who probably have no idea either.
The market is more difficult than you think. Stock market absorbs an unbelievable amount of news and information and it acts like a super computer. When you buy or sell in the market you are hoping that the current prices are wrong and somebody else in the market is against you to buy or sell in hope of making money against your transaction. When you buy Reliance Industries in the hope to raise the price, somebody sell it in hope of falling the price of Reliance Industries Ltd. This days, there is intense analysis by funds managers and bank’s portfolio managers and still they are getting wrong, often speculation is wrong. So, be caution.
Good trading and investing is all about Risk Management, Not Prediction. If anyone can make successful forecasts constantly, he or she (1) do not need to read this article and (2) will have to re-tired in complete luxury. For us, we need to decide for ourselves about the level of risk we are willing to accept. It’s good to take shock and lose small amount of money after investing in for quick profit. It’s all about managing risk.
Everybody is a hero in bull market : With the both trading and investment, luck always parades as skill. In the bull market you will see many people who are very happy with their ability to pick right stocks. They may have observed the stock very closely before buying them and satisfy them to make little profit. A rising tide lifts all the boats, even the rusty one. Many stock do well in bull market, even they don’t have anything special.
But what will happen after the bull market is over? The same people will blame their luck, who were happy for ability to pick right stocks. As the prices go higher and higher, their investments size also go higher and When the bull market is over, they would have far more money at risk than they would imagine a year earlier.
In 80′s and 90′s Orkay Ind. and Oswal Spinning were ruling the Indian stock markets, just disappeared from the market, loosing all money of the investors. During same period Reliance Group was growing, and become the most powerful in recent years.
The reward gained from stock market must be higher than what we can get from bank fixed deposit or Companies deposit or bonds. In Indian markets return on deposit range to 6% to 10% and inflation is about 7 to 10% per annum. Inflation is appreciating the value of shares. Calculating the reward against the risk of investment in stock market, why not to add up the inflation rate with deposit return. Recently that come up to 18% per annum.
For the risk management, the most important thing is to always have a rough idea of how much money can be lost if the markets move against our open position and should be able to bear the loss if necessary.
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