Direct investing or trading in the stock market can be a double-edged sword. It can be both thrilling and devastating. Worse, it can be addictive. Take Ahmedabad-based Mahesh Jagnani, 55, trading in the stock market for a living for two decades. In his early days, he used to invest on the basis of tips and recommendations but when he piled up substantial losses in the mid-90s, he stopped all market-related activities and studied investment and trading strategies for two years. When he came back to the market, he was wiser. "Earlier, I relied on tips and recommendations. But, in the past two decades, I take calls, based only on my research," he says.
For every successful case like Jagnani, there are thousands or even more who are unable to earn a regular income from the stock market. And, there are many who are simply addicted. "I had a client who lost huge monies in the 2008 crash, but he refused to give up. His wife and child left him to stay with the in-laws because he couldn't afford to feed them or pay for the child's education. He sold his house and stayed in a chawl. But, every day, at 8.45 am, he would be at our office with some money to trade," says a broker under condition of anonymity.
To be able to consistently make money, one has to go through a long learning curve, be disciplined and take calls based on one's own research and reasoning. Many meet failure because they speculate, keep unrealistic returns expectations and don't manage risks properly.
Find your strengths: Individuals who have been making money from markets attain success due to one thing - they focus on a single strategy that they understand well and they hone it over time. Jagnani uses technical analysis. Mumbai-based Abhishek Sipani, 35, relies on macroeconomic data. He started his career as a commodity analyst where he had to analyse economic data of many countries. After turning to markets fulltime, he takes calls on indices only. "The August Consumer Price Index is lower than July. If I look at other data and conclude there would be a rate cut, I can take a call on the Nifty Bank index," he says. He tried his hand at analysing companies but couldn't get it right.
Manjeet Singh Vora, 66, another veteran, relies on three-four technical parameters such as Renko bars (a chart type that only measures price movement. Traditional elements such as time or volume are not present) and Heikin-Ashi Candlesticks (this chart is use to isolate trends and to predict future prices). Vora, who took voluntary retirement from Andhra Bank, spent four years learning technical analysis and doing paper trades - taking calls in his notebook rather than in that stock market.
Avoid trading frequently: Just because a person has a strategy that makes money doesn't mean he can use it every day and it will work all the time. None of the three individuals who are making a living from the stock market sits in front of the computer all day looking at the index or stock movements to identify an opportunity. Vora does his research over the weekend for the coming week. Sipani waits for the macro economic trend to present an opportunity. All of them believe that trading frequently will eventually result in losses.
Manage risks: No one gets all their bets right every time. "That's why one should always keep a stop-loss, based on one's ability to stomach losses," says Jimeet Modi, chief executive officer at SAMCO Securities. Say, a person has a capital of Rs 1 lakh and can afford to take a loss of only Rs 2,000. Then, he must keep a stop-loss of two per cent on each stock call. Experienced individuals also use only a portion of their capital, two to five per cent, for each bet and they stick to this limit always - no matter how big the opportunity is.
When starting out, start small and increase gradually. Avoid leverage or borrowing on your portfolio. In the initial days, when Sipani took leverage and bets didn't turn out as expected, he was hit hard. Another key to managing risk is admitting when you are wrong. When bets go wrong and stock falls, many individuals start buying more shares of companies trying to lower the average purchase price. This is one of the common reasons why beginners lose money heavily.
Remain active and keep reviewing: The longer you manage to stay active in the stock market, the more experience you gain. This helps individuals understand how markets behave in different circumstances and also to evaluate their strategies across market cycles. For those using fundamentals to evaluate a company's stock, don't take a decision to sell because the stock price has corrected. Check whether the reasons for which you bought the stock have changed. The markets can be wrong in valuing a company.
Don't be in a hurry to sell once your price target is met. Doing so can take a multi-bagger out of your portfolio. Kejriwal takes the Bharat Electronics stock as an example, which traded in a range of Rs 15-19 in 1998-99. In August 2015, it touched Rs 4,125 before the a 2:1 bonus was declared the following month.
While one can make money in the stock market regularly over long period, it's not easy, say experts. Only a few have the discipline and patience to stay in the markets and learn from mistakes. Be prepared for a long haul if you decide to make a living from them.