When it comes to long term investing knowledge, patience and financial planning is the key.

Knowledge – In which stock to invest?

Patience – When to book profits or exit the stock with a loss? 5%, 10%, 20% or more?

Financial Planning – I have 10 lakhs to invest. In this stock how much should I invest?

If the above all three are correct then there is a very high chance that you will make good money from your investments.

However there is more. The above are three basic principals, I dig more into some more important principals of stocks investing.

If you follow these investing principals you will come out as a gainer from stock markets.

Sell losers fast and let the winners ride

Assuming you decided to invest in 10 stocks in next 5 months times. You decided to invest Rs. 1 Lakh in each stock. Then you must plan a stop-loss percentage and profit taking percentage. Ideally stop-loss should be half of profit taking percentage. For example stop-loss can be 5% and profit can be 10%. However out of ten stocks there should be three or four stocks that you should keep for at least 10 years.

Lets take an example of a multibagger stock – Yes Bank.

In 18-Jul-2005 Yes Bank was Rs. 64.10. After 12.2 years on 20-Sep-2017, Yes Bank was 1880.10. This is an Absolute Return of 2833.0733%, Annualized Return of 31.9741%. Look at the below stock chart – do not miss the dividends paid. Do not forget that both dividends paid and profits made after 1 year are TAX FREE. This means the return along with dividends us much more than 2833.0733%.

Yes Bank 18-July-2005

Yes Bank 20-Sep-2017

Assuming a rich investor invested Rs. 10 Lakh in this stock in 2005 and exited in 2017 he would have made Rs. 2,93,30,733/- (Rs. 2 Crore 93 Lakhs 30 Thousand and 733 + Dividends). If we include the dividends the profits are much more than Rs. 3 Crores in 12 years.

Unfortunately I do not think there is a single investor in India who actually achieved this feat. I do not know if Yes Bank does give employee stock options (An employee stock option (ESO) is a stock option granted to specified employees of a company. ESOs offer the options holder the right to buy a certain amount of company shares at a predetermined price for a specific period of time.) If they do then some of its employees may have become extremely rich who may have joined in 2005 and still are serving the company and holding on to the stocks. Owners / Managers of Yes Bank have obviously became very rich.

Do not believe in Tips work on your own

Tips provider without any authenticity are best avoided. You must have received SMS/phone calls like make 5 lakh from 50 thousand in one week or something like that, or contact for free two days free trails etc. Do not respond to these messages or calls. If you have a smart phone you can install truecaller app and block these phone numbers for ever. Then there are friendly tip providers also like your brokers, friends, colleagues, relatives etc. It is better to avoid them too.

If can research about fundamental analysis then its good else BSE has selected top 30 stocks to invest. You can chose 4-5 from the list. Here is where you can find the list of top 30 stocks to invest. If you find it difficult to chose 4-5 from the list there is a simple way to figure out which stock to invest in. It is written in my How To Select Stocks course. This course will make you an informed investor in stocks, mutual funds and all other investments available in India. You will know the difference between good and bad investments. After doing the course you will be able to manage your finances well.

Do not panic with slight move in stocks against your buy rate

This is a major problem with most investors. As soon as they invest money in stock they want the stock to move up. If they see it going down they panic and press the sell button. Even the best stock will go through a rough phase. 10% up or down is very common. Do not panic and sell if you have a long term goal.

P/E Ratio is good factor but no the only factor – give it some importance but not all

PE Ratio is one of the most overlooked by novice investor and sought after and studied by experienced investors of a company’s stock since ages. PE Ratio gives an idea on whether the stock price is undervalued or over valued at a given time. Most of the times when a stock is overvalued it falls and if undervalued it goes up. PE Ratio is just one of the indicators to invest in stocks, there are others as well but PE Ratio is a very important indicator.

PE Ratio gives an indication whether current price is justified to buy the stock or not. You can read more about PE Ratio here.

If you find a good strategy juts stick to it – do not over-experiment.

Nothing more to be said here. After few experiments I stock to my my own strategies written in my course.

Think about what will happen to your account tomorrow or in the years to come not the very next second.

Long term is long term do not make it short term.

Have two accounts – one for long term investing only and other for short term trading or investment.

Keep taxes into account while investing or trading. Long tern (over one year) there is NO TAX – short term less than one year – there is 15% tax on profits.

MCX has introduced gold option contracts that start trading today. It is good news for option traders who are profitable trading options. Liquidity in Gold Futures trading is very good which will show in Gold Option trading too.

However you must hedge your trades – without hedging you are at 100% or more risk.

Hedge is a trade that protects another trade – so basically you become a broker – take money from one hand and give from another.

Hedge reduces the risk of adverse price movements in any trading object – equity or derivatives. A hedge is taking opposite position in same or related security. Pair trading for example is a part-hedge not fully hedged trading.

Basically hedge in an insurance for loss in trading especially derivatives. Like for medical emergencies we buy medical insurance, for accidental death we buy term insurance – same way for trading losses we can buy insurance.

Hedge reduces potential risk and limits the loss to a large extend. It also takes away some gains, but is a boon when the original trade is going for a huge loss. For overnight positions hedges are recommended. But hedge comes at at cost – it is not free.

For example when you could have made 10 points profits, hedge may reduce it to 7 points. But if you could have lost 10 points – hedge will reduce it to 3 points.

Therefore the joy of trading with a hedge is unmentionable. Imagine difference between a trader trading without hedge and a trader trading with hedge.

One is at a unlimited or huge risk and another is at limited profit or loss. A profit is a profit even if limited.

If you are still doing trading without hedge you can do my course and change your trading results from tomorrow itself.

Stock markets are at all time high and a lot of investors may be thinking of what to do with the profits they have made on stocks. If you are one of them, these are the things you can do:

1. Sell part of your holdings and book profits: This will help you to re-enter the stock if it falls again or you can get into another stock.

2. Sell all stocks and buy calls: Some investors do not want to sell their stock holdings thinking that it may go up even further. For them it is suggested to do the “Stock Replacement Strategy”. In this strategy, stock profits are taken and replaced by derivatives.

For example Mr. Amit bought a stock at 100 and now its at 200, he still feels that the stock will go up but do not want to miss out on the profits. So he sells the stock, book profits and buy one ATM call. Now this CE is bought from the profit made in the stock. If the stock moves up, Amit will profit from the Call bought else he can exit at a small loss. By doing this he has ensured booking profits in the stock at the right time, the loss in the call will not hurt much, but the joy in selling the stock at the right time will be more.

Some investors are reluctant to sell stocks they can do this:

3. Buy At The Money Puts: This is known as married puts to save the gains made from the stock or lock-in-the-profits. There is no point in doing married put strategy if you do not hold a lot of stocks (equal to lot size of the derivative of that stock) of a company. In that case its better to sell at least a part of the holdings. See point 1.

Or do this:

4. Buy Out of The Money Puts: If you do not hold enough stocks of a company but still want to lock in the profits you can buy slightly out of money puts. These are not exactly married puts, but will ensure at least partial profit booking even if the stock falls 10%. Out of the Money Puts will be slightly cheaper too and will not hurt your pocket.

Before new traders start trading they have “high hopes”. Here are some of the high hopes:

1. I will invest 5000 and make 10000 every month. They forget that its 100% return a month.
2. If Nifty will open gap up I will buy calls, if it opens gap down I will buy puts and make money. Its a myth that if there is a gap up the stock will keep going up or if gap down the stock will keep going down. Reversal is always possible.
3. Thought process of a new but rich-son trader: I will invest 1 lakh and make 1 crore in one year and prove my dad that he is a fool working hard in his business making just 30% return a year.
4. In five years time I will be a multimillionaire.
5. New option trader: I will buy an option for 10 and sell at 20 – doubling my money every time I trade because I have seen that happening many times.

Reality: ALL of the above are just a myth, not a reality.

With time the stock markets teach them the reality.

Here are checklist for new traders before you start trading:

1. Make a list of all your trades – its profit loss and the mistakes you did

When I say each trade it means that. Buy a note book (yes a note book – not just a soft copy – but make a hard copy). Write date of trade, time taken to trade, closing time of the trade, total money at risk, why you took the trade, profit or loss and reasons for profit or loss. Everything is important.

Review this note book at the end of every trade.

2. Money Management

You must know how much you are willing to risk in each trade. When starting new do not risk more that Rs.1000 per trade even if you are son of a very rich man or you have a very high salary. 1000 rupees is 1000 rupees – it has same value whether in hands of a beggar or Mukesh Ambani (one of the richest man in world and the richest man in India). Later when you have some experience you can increase the stop loss limit.

Therefore you must keep a stop-loss in the system as soon as your trade is triggered. Read this for more information on stop loss:
Best Ways To Keep Stop Loss For Intra Day Trading

3. Moving Averages

If you want to be day (intraday) trader focus on moving averages. If you want to trade in very small time frame then 5 minutes moving average is the best indicator. Read this: How to trade moving average

4. Do not trade as soon as markets open

New traders cannot stop themselves to start trading as soon as markets open. This is a very wrong time to trade. During the first half hour and last half hour it is the new traders who are quite active in markets. First half hour belongs to the novice intraday traders, the last half hour belongs to the stop-loss takers and BTST (Buy Today Sell Tomorrow) traders – hoping to trade the gap up and down.

Fact: Markets take time to settle down when professional traders enter. Professional traders enter only after 9.45 am and leave (close their trades) before 3 pm.

5. Plan your trade before you enter

You cannot trade without a plan, you will most likely fail. Therefore you must know exactly what you are doing in your trade. Just trading to trade (speculative trades) will not make you money.

6. Educate Yourself

Keep reading and researching if you want to be a serious trader and make it a full time income. Anything that you find yourself good at, research more on that subject. For example due to good liquidity, proper fills and trading volumes I mostly trade Nifty options and Bank Nifty options in a very conservative way.

Contact me if you are interested in doing the course.

Making trade adjustments can help you reduce losses to some extend but not eliminate loss. For example sometimes option buyers average out buying options. Like buying at 10 then 7 then 5, thinking that since the average buy rate has come down, if the stock takes a U-Turn they can exit in profits.

Very rarely it happens, their entire money invested becomes zero (option expires worthless). There is only 1% chance that within limited time-frame the stock revives and takes a U-turn and the trade becomes either profitable or the trader exits with a small loss.

Fact is, if the trade was entered poorly the Trade Adjustments will not be helpful at all. It can either minimize losses or sometimes increase the loss.

For example if a trade with 80% success rate makes 1000 rupees and loses 4000 rupees then that 80% win rate is useless.

Here it is:

+1000
+1000
+1000
+1000
-4000
+1000
+1000
+1000
-4000
+1000
=======
Net ZERO
========

Imp Tip: If you make sure that your losses are reduced by 50% then the same trade above will be profitable.

+1000
+1000
+1000
+1000
-2000
+1000
+1000
+1000
-2000
+1000
=======
Net +4000
========

For this to happen you have to ensure:

1) Good entry points – entry time is very important for the trade to be profitable.
2) Proper stop loss placement.

Note that one trade is not enough. If you decided to trade something you must trade at least 10 times to see if it’s a good trade for the long term or not.

Swing trading is buying low and selling high in a short span of time. Some traders do it Intraday called as day traders and some take position for a few days.

Swing trading combines fundamental and technical analysis in order to find the stocks direction from the current position. Swing traders do not look for only up direction, if they feel the stock may go down they short them. All they are looking for is short momentum.

When they see the stock is not poised to move they do not take the trade. The benefit of swing trading is efficient use of time and money and higher returns. However their are drawbacks as well like high brokerage commission and high losses if their trade goes wrong.

Swing trading can be difficult for the average retail trader who is not equipped with either technical or fundamental knowledge. Some of the good technical indicators are Bollinger Bands, Candlesticks, moving averages, Average True Range – ATR etc.

Using the above indicators a trader finds quickly if a stock has the potential to move up or down. Based on this they are able to take the trade.

Please note that swing trading is not intraday trading, its short-term stock movement trading. It is usually taken for a few days with proper stop loss. Of course it is better to hedge a position. I personally do not recommend trading without a hedge. The only trade that you should take without a hedge is equity cash buy-hold-sell. By the way equity cash buy-hold-sell is not trading, its investing even if its taken for one second or many years.

Benefit of awing trading is that you do not have to follow trend. Swing trading is to find out short term moves which are independent of the trend. For example a stock may be going down for 2-3 months, but a good swing trader will find out the short term support and buy the stock for short term. When the stock bounces back, the swing trader benefits and exits the stock.

Most swing traders hold the stock overnight or a few weeks, rarely it goes beyond 30 days. To minimize risk position size is very important. The risk word is very important here. For example if the trader is 60% sure the trade will go through, they may increase the lot size compared to a trade where they are 50% sure. This is pure professional trading.

What is the philosophy of Swing Trading:

Every stock goes through four stages of movement:

1. Base Stage – Trending and moving in almost straight line – here both buyers and sellers are same so stock does not move much.

2. Advancing Stage – Some good news has come in, or the company performance is better then market expectation. Now the stock goes into second stage – it starts to move up. Swing trader buys the stock in this stage.

3. The Top Stage – After an up-move buyers starts to decline and the stock surge stops. This is knows an topping out. Here the stock will decline some and rise some giving a head and shoulders pattern. This is signal that the stock will fall. Here is where the swing trader will sell and book profit in the stock.

4. The Falling Stage – Sellers increase and the stock falls and goes into a downtrend.

See this image you will understand the different stages of a swing:

Explanation:

After the consolidation (Stage 1) – the breakout starts (Stage 2), this is where the Swing Trader enters the position. This can be anywhere from the rising trend. Good Swing traders do not get caught at the tops. Stage 2 is where most good swing traders enter when the uptrend is confirmed.

How Is the Uptrend Confirmed?

When a stock is in an uptrend its close will be above the previous close with increased volume day by day. If this happens for a few days then the trend is confirmed. This is the place where a swing trader enters.

How Is the Downtrend Confirmed?

Its exact opposite of uptrend. The stock will close below the previous close for a few days and the volume will also decrease. This is the time for a swing trader to exit and take out profits.

Do not forget that this cycle is will repeat.

Experienced swing traders keep on radar 4 or 5 stocks only as it becomes difficult to keep a watch on more than 10 stocks.

Within three months they become well aware of the average volume in the stock, support and resistant levels of the stock. After six months the stock makes a new support and resistant levels.

Please note that its very rare that swing traders enter Stage 2 at the best point and exit at Stage 3 at the best point – but its about making profits. They have a target in mind and if that is achieved they exit the stock.

Are you a swing trader? What are the problems you face?

PE Ratio is one of the most overlooked by novice investor and sought after and studied by experienced investors of a company’s stock since ages.

PE Ratio gives an idea on whether the stock price is undervalued or over valued at a given time.

Most of the times when a stock is overvalued it falls and if undervalued it goes up.

PE Ratio is just one of the indicators to invest in stocks, there are others as well but PE Ratio is a very important indicator.

Let say you are undecided to buy shares between two companies in the same business field, then PE Ratio is the best indicator to look at before buying share of a company.

PE Ratio gives an indication whether current price is justified to buy the stock or not.

How Is PE Calculated?

PE is calculated by dividing the current market price of the stock by its Earning Per Share (EPS). It shows the sum of money you are ready to pay for each rupee worth of the earnings of the company.

PE = Market price / EPS

Let us assume there are two companies XYZ and ABC both in the IT sector and have almost same services, products, pricing of services & products, financials, infrastructure, debt etc. In that case how to decide which company share to buy?

Here is where PE ratio helps.

Let us take example of Wipro and Infosys – both are Information technology consulting company. Assuming Laxmi wants to buy either Wipro or Infosys as a long term investment but is undecided which company to pick. Both company looks good in future, so she decided to look at the stock’s PE ratio.

She gets Wipro stock PE from moneycontrol.com site here:
http://www.moneycontrol.com/financials/wipro/ratiosVI/W#W

WIPRO EPS (Rs.) 33.61 as of Mar 2017.
WIPRO PE = 285/33.61 = 8.47

Then checks Infosys stock PE from moneycontrol.com site here:
http://www.moneycontrol.com/financials/infosys/ratiosVI/IT#IT

INFOSYS EPS (Rs.) 60.16 as of Mar 2017.
INFOSYS PE = 902/60.16 = 14.99

If you are comparing two stocks then the stock with lower PE ratio is a better buy as the market price has not gone up to reveal the earnings prospects of the company. However this does not mean that the higher PE company has no growth prospects, it may have better growth prospects but still there are chances that the company stock with lower PE may generate better returns in near future than a company stock with higher PE in the same sector.

This means Laxmi will buy WIPRO stocks as it has lower PE 8.47. than INFOSYS 14.99.

PE can be very high in certain sectors, and can be very low in other sectors. Therefore PE comparison is important in the same sector business. Any major announcement of a major order or acquisition by the company will push up its PE. You need to keep this in mind while calculating PE.

Note: PE ratio cannot be considered to be a totally reliable indicator of cheap, good stocks. In future the company may not perform as expected and the share price may fall. Still, PE ratio remains one of the most important ratios when it comes to stock selection.

Covered call is very popular among the high net worth individuals who buy shares for the long term. These people take benefit of covered call to make money every month. Covered calls are very poplar in US where high net traders are many.

What Is Covered Call

Covered Call is a method to sell shares in a future date with no obligation to buy back if certain conditions are not met.

When you own a stock you have the right to sell anytime at market price or in future at a higher price using options. Covered call is selling the stock to someone else at a higher price in a future date for an agreed money as shown in in system. This money varies from stock to stock and price to price.

Basically when a covered call is done the owner of the stock sells the stock to someone else at a agreed price to get cash today. This is done at a higher price than the current price of the stock. This means that the owner of the stock gives the buyer of the option the right to buy his shares before the option expires, at a predetermined price, called the strike price.

Now What May Happen In Expiry

If the stock does not reach the predetermined price or the strike price which the owner sold the stock for, the Call Option expires worthless and the owner of the stock keeps the money he got to sell the stock at date price.

If the stock reaches the predetermined price or the strike price which the owner sold the stock for, the Call Option becomes In The Money (ITM). In this case since the sell price is lower than the buy price the owner have to take the loss on the option sold, but can cover the loss by selling the shares he owned.

Most of the times the sold options expire worthless so the owner of the stock keeps the money he got while selling the call. Otherwise they can always sell the stock to cover the loss.

This week I finished reading a book written by Robert G. Hagstrom about Warren Buffett – the best investor in world entitled “The Warren Buffett Portfolio.”.

This book is different than what I have read on Warren Buffett in other books.

Here I would like to point out some very important highlights of the book.

Stock Is a Business

Before you buy a stock you must think whether you want to be a part owner of that business? If you are not comfortable being its owner then do not buy that stock.

Think Long Term

If you want to start a business, do you want to keep making money for the short term or long term? Of course you will plan for the long term. Same should be the case if you want to buy a stock for investing not trading.

Note that stock investing is not the same as stock trading.

Stock trading is buy and selling a stock for intraday, few days or few months. Stock investment is holding a stock for at least about a year. Though Warren Buffett average holding period is more than 5 years.

Increase Your Investment Size and Do Not Diversify

Warren Buffett did not believe in too much diversification neither keeping all eggs in one basket. He did thorough research and invest a lot of money in a stock for a long timeframe. Warren Buffett did not invest in mutual funds also as he was against too much diversification. His exact number of stock holding is unknown.
.
However if you are not as good investors as Warren Buffett, it is advisable to invest in mutual funds.

Reduce Turnover

Warren Buffett believed not to churn in and out of stocks frequently to avoid paying taxes on gains made. In India long term capital gains are not taxed. For that one needs to hold the stock for at least one year. Warren Buffett that taxes will reduce the profits coming out of the stock investments.

In India long term profits are not taxed because the company has already paid their taxes. The profits you get after selling the stocks after one year is after paying the taxes by the owners of the company. Since the taxes has already paid there is no need to pay taxes again. However short term profits (less than one year holding) are taxed.

Ignore What Experts Say

Warren Buffett rarely listened to experts forecast on future of a stock price long or short term. He focussed on fundamentals of a company. If believed that if a company is good at fundamentals the stocks will price in that in future.