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The Securities and Exchange Board of India (Sebi) announced on Tuesday, 01-Oct-24 measures aimed at reducing undue speculation in FnO trading (mainly options) particularly from retail investors. They will be introduced in a phased manner beginning Wednesday, November 20, 2024.

Why did SEBI take these measures?

SEBI from time to time does research on various topics to find out what traders and investors are doing in the stock markets. You can find the list of all the research here. There are two research, results which prompted SEBI to take these measures. The links to the research are below:

Jan 25, 2023 – Study – Analysis of Profit and Loss of Individual Traders Dealing in Equity F&O Segment

Sep 23, 2024 – Study – Analysis of Profits & Losses in the Equity Derivatives Segment (FY22-FY24)

SEBI found out that over 91% of Futures & Option trades lost money trading in all the years in which the research was done. The data was taken from the top 10 brokers in India. Retail traders collectively made net losses amounting to a staggering Rs 1.81 trillion in F&O from March 2021 to March 2024.

SEBI wants to keep the retail traders away from Future and Options trading as much as possible so six measures were taken. These six measures are aimed at reducing undue speculation in FnO trading (mainly options) particularly from retail investors.

These six measures are:

1. Upfront collection of options premium:

Some brokers (not all as of Sep 2024) still do not collect the full premium for buying options for intraday trading only as of writing (Thursday, 03-Oct-2024). The margin they block is decided by the stop loss taken by the trader. Note that if there is no stop loss, then the full margin is blocked.

For example, today is the expiry day of weekly Nifty options. At 1.46 pm 3rdOct 25300 CE (Call Option) has a premium of 19.5 and the lot size is 25.

Now assuming Amit trader thinks that Nifty will shoot up in the next 30-40 minutes and wants to buy this option to make quick money. He decides to buy 10 lots.

So the margin blocked should be 19.5 * 25 * 10 = 4,875.00

All brokers who block the full margin will block 4875.00. However, the brokers who give leverage on buying options in intraday trading will block only the maximum loss possible.

If the final trade is:

Buy 10 lots of 3rd Oct 25300 CE and the stop loss is set at 15.5. then the max loss possible is

(19.50 – 15.50) * 25 * 10 = 1,000.00

Since options are highly liquid on the expiry day there is a 99% chance that if the price of the option drops – the stop loss will be executed.

Therefore the brokers who do not block the full margin will block only 1,000.00 for this trade. However, this will change if the stop loss is placed somewhere else.

Why do they do this?

To encourage their clients to trade more often. And this will help even a poor trader to trade options.

Well, the fact is they say this to advertise their product but in turn, it harms the trader but makes more money for the brokers.

However good thing is it will stop on Saturday, February 01, 2025.

How does it affect you?

Not much if your broker already blocks full margin to buy options intraday. However, if your broker blocked margin equal to the max loss, you have to trade less number of lots from Feb 25.

This is good news as 91% of option traders lose money trading options. Due to the leverage given they lose more, now if they still want to trade they will lose less.

Other measures are:

2. Contract size has now been increased to ₹15-20 lakh from 5-7 lakh currently. Only for Index derivatives they have written. Again this is confusing. If you know more please inform me.

3. No calendar spread benefit on the expiry day. I think they are talking about the margin benefit given on a spread. Let us wait for more information.

4. Intraday monitoring – 4 snapshots will be taken randomly and sent to the exchanges to monitor exchange set limits.

5. Additional 2% margin on all expiry days.
 This is done to reduce speculative trading on the expiry days.

6. Each exchange can have ONLY ONE weekly expiry contract from Nov 20, 2024
. I think Nifty will keep Bank Nifty weekly expiry as it is the most popular weekly expiry. Nifty weekly and others will have only monthly expiry.

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This new investment class is for HNIs only – i.e. people with a minimum of 10 lakh to invest.

I read a lot of websites but the whole picture is not clear.

I have understood that there will be certain rules for investing in derivatives, and it will fall between mutual funds and portfolio management services.

I fail to understand why this was necessary when there are thousands of mutual funds and many portfolio management services already available.

When the whole picture becomes clear I will write a detailed post. Till then if you have 10 lakh to invest I would request you not to invest in this new asset class now. It takes time to understand a new investment opportunity, how it works, what are the risks and rewards etc.

Invest only when you fully understand this or any other new asset class.

Here are a few features of this new investment class:

A. The minimum investment limit for these schemes will be ₹10 lakh per investor across all strategies.

B. This asset class will fall somewhere between mutual funds and PMS (Portfolio Management Services).

C. These will have adequate safeguards such as no leverage, and no investment in unlisted and unrated instruments beyond what is permissible for mutual funds. Exposure to derivatives is limited to 25% of AUM for purposes other than hedging and rebalancing.

D. These offerings will be referred to as ‘investment strategies’ to keep them separate from the traditional instruments of mutual funds.

Let us wait for the advertisements from the mutual funds, then we will understand this new investment scheme better.

I suggest just keep investing in good stocks, and mutual funds and trade derivatives with hedge to be safe. You can do my paid course to learn some good options and futures hedging strategies.

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Article posted on: Sat, 28-Sep-2024

Look at this Nifty 50 returns of the last 5 years as of 28-Sep-2024:

Source: Google Finance

Almost all stock market pundits are saying that the stock markets will now fall. The valuations look stretched and may not be sustained.

Usually, I do not follow these pundits because most of the time what they say is for the very short term which no one should be bothered about.

You may have noted that 50% of them say markets will go up in the short term, and the rest say they will go down.

It is better to ignore them and plan your trades as per your research or knowledge.

But this time things are different – almost all of them are saying that the valuations are stretched and do not reflect the actual returns from the companies listed.

Especially the midcap and small-cap stocks have generated returns that are over-stretched and should correct within the next few months. Here are the returns:

Nifty Midcap 150 Index:
As of September 20, 2024, this is the absolute returns:
30.01% for the year to date
47.75% for the last one year
84.99% for the last two years
105.04% for the last three years

Nifty Smallcap 250 Index:
As of September 20, 2024, the returns are 34.56% for six months, and 51.77% for one year.

Nifty 50 Index:
This index had the following returns over the last 15 years:
15 years: 11.8% CAGR

Over the long term, Nifty 50 and other indexes have generated almost the same returns.
So they will converge soon if not very soon.

What you should do?

If you have invested in mid and small-cap stocks then book all or 50% of the profits.

Large-cap stock investors need not worry.

 

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Here are a few tips for option buyers especially if they are beginners:

1. Do not buy deep Out of The Money (OTM) options. They almost always expire worthless.

2. Do not buy deep In The Money (ITM) options. They behave like futures. Losses will be more than the profits. If you are a deep In The Money (ITM) option buyer – trade futures instead.

3. Keep the target and stop loss in the system as soon as you buy the option. With a system target and stop loss, you need not monitor the trade once it’s live – the system will take care of that. If the target is hit, the stop loss order will automatically get cancelled. If the stop loss order is hit, the target order will automatically get cancelled. This type of order is called the GTT (OCO) order.

The full form of the GTT (OCO) order is Good Till Triggered (One Cancels the Other). If your broker doesn’t allow this feature, you can open an account here. This broker allows this kind of order for free. Plus, the account opening is online and free. Stock buying and selling are also free. Click here to open an account with them.

4. If you are not experienced do not start trading with multiple lots. Practise with one lot initially then if you are getting profits increase the lots one by one – slowly. Increase one lot every month but do it up to five lots max.

5. Make an Excel sheet and record all the trades.

6. If you are making losses for more than 3 months consecutively then stop buying options. Then practise selling options with hedge. If you want to learn option strategies with hedge you can do my course.

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First: Budget 2024 in short for investors and traders:

Here are the key takeaways:

1) Higher Capital Gains Taxes

Long-term gains tax: 10% to 12.5%

Short-term gains tax: 15% to 20%

2) No Indexation Benefit – No indexation on investments, disappointing for investors.

What is indexation? Indexation adjusts the purchase price of an asset for inflation, reducing taxable profits and tax liabilities.

For example, you made a 30% profit in 3 years but the inflation for the last three years was at 5% every year. Then you pay taxes on 30 – (5+5+5) = 15% profit only, not 30%. But since this indexation benefit has been taken away, you will have to pay taxes of 30% even if you made this profit in 10 years.

3) Increased Tax Exemption

Capital gains tax exemption limit: ₹1 lakh to ₹1.25 lakh/year

4) Higher Securities Transaction Tax (STT)

Futures STT: Increased from 0.0125% to 0.02%

Options STT: Increased from 0.0625% to 0.1%

5) NPS Vatsalya for Minors

A new pension scheme allows contributions for minors, which become theirs upon adulthood.

How to Save Money From These Taxes?

Tax-Loss Harvesting. I did some research but could not find a correct solution. Then I used my expertise and found out an idea – here it is:

If you do not know tax-loss harvesting is a legal trick to save taxes on the short-term & long-term gains.

Let me explain with an example.

Step 1) Let us assume you bought two company shares – XYZ & ABC company shares both for 1 lakh. After six months XYZ company is giving at 30% profit and ABC company is giving a 40% loss.

Step 2) Now sell both. On paper, you have taken a 30,000 – 40,000 = -10,000/- short-term loss.

Step 3) The next day buy the ABC company shares (the one in which you took a 40k loss) for 60,000. Note that after selling ABC company shares you received 60,000 after taking a loss of 40,000. Use the same amount i.e. 60,000 to buy ABC company shares.

Step 4) DO NOT sell the ABC company shares for one year.

Thats it. Instead of paying Short-Term Capital Gains (STCG) Tax on 30,000, you can carry forward the 10,000 short-term loss for the next 8 years and adjust against any short-term gains in future to save taxes.

So you not only saved taxes but carried forward a 10k loss to be adjusted in future against any short-term gains.

You can carry forward your losses – both short and long-term for 8 assessment years immediately following the assessment year in which the loss was first computed.

Make sure to file these losses on your IT return so that when you book profits you can adjust these profits against the losses and either pay no tax or pay less tax on STCG  & LTCG.

You can do the same to save money on Long-Term Capital Gains tax. Here is an example:

Let us assume you have shares of two companies – ABC and XYZ company of 1 lakh each. After 1 year ABC is running at a loss of 20k and XYZ at a profit of 15k. You can sell both. Currently, you have an overall 5k loss. Now do not buy the shares of the company you booked profit in. Next day buy shares of ABC company in which you took the loss. Hold it till the next financial year. That’s it – instead of paying taxes on the profit you made you can file a carry forward loss of 5k and adjust against any gains made in the long term in ABC company or any other company shares for the next 8 years.

Is Tax Loss Harvesting possible in derivative trading?

No. Unfortunately, you cannot do this in derivative trading.

Actually, you can but closing a Future / Option and buying / selling it again will cost you huge Securities Transaction Tax (STT). See above. The cost of STT will be so high that it will offset the profits and increase the losses.

So tax loss harvesting is not recommended in derivatives trading unless you are an exceptional trader.

Securities Transaction Tax (STT) has almost been doubled and it just cannot be saved. It is charged on every trade you take. Unlike GST it doesn’t even have a credit input. It is a tax that you have to pay even if you have taken a Short Term or Long Term Capital Loss.

The only way out is to be a profitable trader. Losers in derivative trading will now lose more due to an increase in STT.

You can do my conservative options and futures course and learn hedged and stress-less strategies that will make small but consistent profits.

What traders say about this course

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Date of Posting: Monday, 08-July-2024

Note: This is a copy of the newsletter I send to my subscribers almost daily. If you also want to read please subscribe above.

I am sure by now you must have read or heard that the founder of India’s first discount broker Mr. Nithin Kamath (Nithin Kamath is the Co-founder and Chief Executive Officer (CEO) of Zerodha, the largest stock brokerage firm in India, headquartered in Bangalore, Karnataka) saying in social media platform X post, that they may need to reconsider their zero brokerage model or potentially raise brokerage fees for F&O (futures and options).

This after SEBI issued a circular mandating that all market infrastructure institutions, including stock exchanges, adhere strictly to their fee-charging practices.

I will explain what that circular is later but as of now if you trade derivatives should you worry?

NO.

Right now it’s a wait-and-watch situation. Don’t unnecessarily panic. Even if there is an increase in brokerages buying stocks, I think most will start with a Rs.10 increase, which is almost as good no increase.

Suppose you make a profit of Rs.1000/-. Right now you get 1000 – STT – Current Brokerage. After the increase in brokerage, you will get 1000 – STT – Current Brokerage-10-10. Just think what difference will it make to your life. Not much.

What exactly was the SEBI circular that may have led to an increase in brokerages across all brokers?

In its bid to create parity among market participants, concerning turnover charges, the Securities and Exchange Board of India (Sebi) on Monday, July 01, 2024, issued a directive to market infrastructure institutions (MIIs or the brokers) to levy a uniform fee, irrespective of the size of the market participants, essentially stock brokers.

Here is the circular:

https://www.sebi.gov.in/legal/circulars/jul-2024/charges-levied-by-market-infrastructure-institutions-true-to-label_84506.html

Stock exchanges charge a transaction fee based on the overall turnover contributed by a broker in a month. The more turnover, the lesser the transaction fee. You can see the latest slab-wise transaction charge charged by NSE here. The difference between what the brokers charge the customer and what the exchange charges the broker at the end of the month is a rebate. Such rebates are common across the major markets in the world.

Zerodha earns about 10% of its revenue from these rebates. This could range between 10% and 50% of the revenue for other brokers. With the new circular brokers will no longer earn these rebates.

So they have no option but to increase the brokerages.

But please do not worry especially if you are not an Intraday trader. For Intraday traders, this can be a problem.

You can do my course and become a non-directional positional trader and save on brokerages and taxes.

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Many times I have written about why you should not take a loan to trade. But it’s been very long since I have written a post on personal finance. This post was written on JULY 18, 2017.

https://www.theoptioncourse.com/do-not-take-a-loan-to-trade/

Do read especially if you have taken a loan to trade or wish to take one.

One of the most important rules of personal finance management is never to take a loan to trade or invest in stock markets.

Even if you are a good trader, most of the profits will be taken away by the loan interest and you will be left with almost 8-10% a year or less which is equivalent to investing in good stocks or mutual funds.

And if you lose that money then you will be in deep trouble.

Another important personal finance management try to avoid personal loans. They come at a very high rate – at almost 12% a year.  If you cannot survive without a personal loan then take at most up to 1 lakh not more and try to repay it as soon as possible.

Today access to credit is easy. Do not fall for the trap. Some loan apps are fraud. Try to avail loan from a well-known bank. If possible walk to your nearest bank and talk about loans. Many look-alike apps can fool you, take your personal data and sell to third parties.

I have not installed any banking app on my mobile to avoid online fraud. If required I access them online from my laptop. The chances of my mobile getting lost are bigger than my laptop getting lost. You don’t know who will get your mobile when lost and what they will do. So to avoid the stress I do not install banking apps at all.

This rule I leave to you, but it is better to uninstall any banking apps from your mobile to be safe.

Of course, we need to buy items/services online and offline so keeping payment apps is ok as long as you have kept them secured with a phone screen lock pattern, PIN, password or fingerprint.

Even if a hacker gets access to your mobile phone they may not be able to open the app. The same goes for banking apps but still, it is better not to have them on your mobile phone at all as checking your bank account periodically can be done easily on your laptop.

As far as home loans is concerned do not hurry to buy a home. Take your time, research well and buy a good home so that you do not need to buy another home after a few years. By taking more time you will have saved enough to buy a good home and take a home loan as little as possible. There is no penalty to prepay your home loan so try to prepay as soon as possible.

The same is the case with a car loan. You should not take a car loan if possible. To avoid taking a car loan downgrade your choice to what you can afford. But if your love for a particular car is very high then take a car loan and pre-pay it as soon as possible.

Car in any case is a liability plus if you take a car loan, the liability will increase.

Have one term insurance equivalent to ten years of your take-home salary and one family health insurance of at least 10 lakh.

Your savings should be invested well in stocks, bonds and mutual funds and do not break them to let the compounding do their job. Of course, you will need money from time to time in that case just redeem whatever is required at that moment but do not stop your investments.

If you follow the above personal finance management tips then you will live a stress-free life as far as your finances are concerned.

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NSE – National Stock Exchange of India Ltd –  Has gone from 8,083.80 on 03-Apr-2020 (Covid Era) to 23,851.35 today (26-Jun-24):

What’s the increase?

It is an increase of 195.05%. All this in just four years.

In the last year from June 23 to Jun 24, it has given a return of 27.63%.

An experienced investor will understand that this will NOT sustain.

In the future two things may happen to the Indian Stock Markets.

  • It may fall by a minimum 5% to max 10%, or
  • It will be range-bound for another 12 months.

From where the money is coming?

It is the Mutual Funds.

The assets managed by domestic mutual funds (MFs) rose by 34 per cent during 2023-24 (FY24) — the most since 2016-17 — propelled by a sharp rally in the equity market and robust inflows.

For the three months ended March 2024 (Q4FY24), the average assets under management (AUM) stood at Rs 54.1 trillion compared to Rs 40.5 trillion in Q4 of 2022-23 (FY23), according to data from the Association of Mutual Funds in India.

Source: https://www.business-standard.com/markets/news/domestic-mutual-fund-assets-jump-34-in-fy24-the-most-in-seven-years-124040400938_1.html

So nothing looks suspicious now, but these kinds of returns cannot be sustained for long.

Why the stock markets can get stagnate or fall?

Most of this influx is from short-term investors. Once they start booking profits the markets will fall.

Or they will stop their SIP investments, and then the markets will get stagnant.

You see for the markets to keep rising money has to keep coming. But we need money to live a life right? One day or the other in the near term that day will come when we will see a fall or an elongated and very boring stagnancy in the markets.

When the markets start falling the non-directional options traders have nothing to lose. But most of the directional trades especially those who will be long in the markets will suffer.

You can do my conservative option course and learn non-directional option strategies and make approx 3% a month.

 

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When a trader thinks that a stock will go up they can:

1. Buy the stock, or
2. Buy its Call Option, or
3. Buy its future. Or
4. Sell its Put Option

Similarly, when a trader thinks that a stock will go down they can:

1. Short the stock (shorting the stock is possible intraday only), or
2. Buy its Put Option, or
3. Sell its future. Or
4. Sell its Call Option

In this article, I will discuss when you should buy a call or a put option. I have explained in my blog that buying an option means you are racing against time. It doesn’t matter if you are buying a call or a put option. Once you buy an option, you are racing against time.

Read below to know when you should buy a call option.

The expiry should be at least 30 days away.

This is very important. If the expiry is very near, then the option’s premiums will start decreasing very fast. The premium decay will be so fast that you will not be able to exit the trade quickly or exit the trade with a profit unless, during that last period, the stock moves rapidly up. Usually, it will not happen because during the last couple of days before expiry all the buyers and sellers create liquidity. The liquidity is so much that the demand and supply remain the same, leading the stock to move down or remain in the same position.

When the expiry is 30 days away, at least for the next 10 days, the time premium value, a.k.a. theta, does not erode too much. So try to exit at least 20 days before expiry if you bought an option.

If the INDIA VIX is below 15 the option premium will be less than average, if it is between 15-20 then the option premiums will be average and if the INDIA VIX is above 20 then the option premiums will be above average and will keep increasing with the increase of INDIA VIX. So decide accordingly.

The benefit of a low VIX is that you will get options at a low cost so the risk will be less, but if the VIX is high you have to pay a high premium to buy an option on the other hand, it will lower the risk as a high VIX will indicate huge movement which may lead to a profit.

However, in most cases, you will know why INDIA VIX has increased. It will be mainly due to an upcoming political event like elections an economic event like budget or geo-political events like a likely war or an attack by another country.

Once the event is over there will be a sudden drop of the INDIA VIX within 2-3 working days. You must exit the bought options before the event ends, or else you may suffer a huge loss as the option premium will erode quickly. In such cases even if you are right in direction the premium erosion will eventually negate the delta increase so you may not get the desired profit or suffer a loss.

Do not buy ITM options, ATM options or Very Far OTM options:

In The Money (ITM) options are very costly. They behave like Futures. If right in direction they will make a good profit for you, but if wrong in direction the loss will be huge.

At The Money (ATM) Options have the most time value and therefore face the fastest premium decay.
Very Far Out of The Money options are cheap but most of them expire worthless as the stock never reaches there. In ten times you will make a profit one time. They are very tempting to buy for their low price – but rarely do they give profit. So better avoid them.

Therefore buy slightly Out Of The Money (OTM) options – 2-3% far. They are not costly and they give good profits when right in direction, and less loss when wrong in direction.

Find intrinsic value to know if the option is overpriced or underpriced – then do this:

Earlier it was difficult to find the intrinsic value of an option as a lot of calculations are involved in the Black & Scholes model formula to know its intrinsic value, but nowadays your broker will display an option’s intrinsic value.

If the price of the option is above the intrinsic value then it is overpriced and needs to be sold. If the price is below the intrinsic value it is underpriced and needs to be bought. This is an important factor when deciding whether to buy or sell options.

However, depending on just the intrinsic value is not an ideal way to buy or sell options.

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There is no need to bother about single-day gains or losses in the stock markets. A single-day stock market loss or gain has no impact on long-term returns. Read below to understand better.

This is what happened on Tuesday, 4th of June 2024 – the day the General Election Results 2024 were being declared and the ruling party (BJP) was not able to garner seats as per their expectations. The markets had a great run before the results day because almost every exit poll in the country gave a clear majority to the current government.

But when things did not go as expected mayhem followed due to panic selling. This is what happened on that day:

Why it happened?

Because 70-80% of the investors (not real data but my assumption based on my experience over 20 years of investing and trading) are short-term investors (people who invest in a stock for a few days to make quick money), these are the people who panic and start selling. Then what happens is called the hyperbole effect. Media comes in and starts shouting on top of their voices – markets are tanking and investors are losing lakhs and crores. The novice investor sees this and in a panic sells his stocks.

Tip: Do not see live business news on TV or YouTube. I have stopped seeing it for years. Instead, read business news in newspapers online or offline. They have limited space and therefore cannot exaggerate news. Plus reading doesn’t make you panic, seeing live news does. Moreover, newspapers report the news the next day – by that time you have already avoided a situation which could have made you panic and take the wrong trade.

Most Important Advice: Do not sell a stock because everyone is selling based on news even if you by chance see it live on TV. Sell a stock only when you want to book profit or the company’s fundamentals have changed and it looks like it will take a very long time for the company to correct its fundamentals.

On that day (4th of June, 2024) this happened in terms of money:

The All India Market Capitalization index, tracked on the Bombay Stock Index, lost over 31.06 trillion rupees, or about $371 billion on Tuesday, June 4, 2024 alone. The losses meant the Sensex index erased all its gains this year in a single day, going from a 5.85% year-to-date gain on Monday to a 0.22% loss position on the next day.
Source: https://www.cnbc.com/2024/06/05/india-stocks-erase-over-371-billion-after-bjp-disappoints-in-elections.html

But who lost? Only those who sold their holdings in loss, not those who sold in profit. So please do not look at these numbers. These numbers are calculated based on overall index market capitalization (03-Jun-2024 close minus 04-Jun-2024 close multiplied by total market capitalization). This is not the total loss got by adding all the losses in each demat account. This is simply not possible but that data is very interesting and important. The real loss of investors will be much smaller than what is shown in the media.

Similarly, the markets gained by many trillion rupees the next day which does not mean that everyone who holds stocks in Indian markets made a lot of money.

Unfortunately, gains are never highlighted by the media – only the losses are blown out of proportion which gets them TRP (Television Rating Point) which in turn gets them more advertising revenues i.e. money. When this happens the business channels on TV and vloggers on YouTube make money – the investors who listen to them lose heavily.

Therefore I repeat the advice I gave above – Do not see live business news on TV or YouTube. It’s noise and it is better ignored.

Here is proof of why a single day’s gains or losses in the stock markets must be ignored. As of writing this post Nifty 50 has given a return of 6.67% from 01-Jan-2024 to 07-Jun-2024:

Nifty 50 returns from 01-Jan-24 to 07-Jun-24

Therefore you should ignore stock markets’ single-day losses or gains. It does not impact the long-term investors. The best way to avoid making panic trades or investing decisions is to stop seeing live stock market news on TV news channels and YouTube.

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