Read to know reasons why emotional trading of greed and fear must be avoided to avoid losses.

Stock traders biggest enemies are greed and fear. I have written a lot on why you must avoid greed while trading and why greed is not good for stock trading. Greedy traders never make money.

Even if you trade in fear you will not make money trading, as trading is a business where risk is involved. Those who fear taking risk never start a business and end up doing a job to earn money.

Both greed and fear are emotions which can hamper in trading profits. Therefore any kind of emotional trading must be avoided.

Stock trading and investment is a proof that many investors start buying stocks at their top and start selling at the bottom.

Buying stocks at their top is Greed.

Selling stocks at their bottom is Fear.

Why investors buy when stocks have reached at their top? Because of the greed that it will go up more and they can make money fast.

Why investors sell when stocks have reached at their bottom? Because of the fear that it will go down more and they can lose more money fast.

Once the trade is over after a few days both of the above traders get frustrated and rue (bitterly regret) their decision.

Buy when everyone is selling and sell when everyone is buying is an very old saying but it is rarely practiced by investors. This is being practiced very well by a well known and the richest investor in the world – Warren Buffet. Read this – Warren Buffetts boring brilliant wisdom and smart billionaires buy when everyone else is selling.

Impact of Media in Investing

A lot of investors who are glued to television screens and listening to business channels get caught in the media hype and start emotional trading as per the news.

For example if experts predict a company’s stock will go up because of great quarterly results, they immediately buy their stock option or its shares in cash with a strong feeling that they will make a great amount of money. It is a different story what happens after that. If the quarterly results are not as per the market expectations, the stock plunges, investors and traders lose. If the results are as per the market expectations the stock does not move much because traders cannot decide whether to buy or sell, again the emotional investors lose money. Only if the company quarterly results beats the market expectations by a very big margin, it’s stock goes up, but does not fly high making a very small profit for the investor and traders.

Option traders have more troubles at hand. Once the news on the stock is out, its implied volatility falls and Option prices drops. This can be dangerous as time has also passed as well as volatility dropped means most of the option premium gets eroded making either a very small profit for the option trader or a small loss in-spite of their trade assumption being correct.

Investors can hold for some time more, but emotional traders do not have patience. Seeing a small profit they exit, or exit at a small loss.

Both of the above type of emotional traders gain nothing out of their trading over the long term.

99% of day traders or intraday traders are emotional traders and take their trades based on emotions rather than for a reason or calculations. No doubt the world is yet to see a very wealthy day or Intraday trader who has generated a lot of wealth by day trading only.

These are the reasons why stock traders must avoid both greed and fear of trading. If you are an emotional trader or investor please avoid these kind of trading.

Lot of new traders get confused on difference between shorting a Call Option and buying a Put. Almost all new traders buy a Put when they feel a stock will fall down instead of shorting a Call.

Note that in technical terms the objective of both trade is the same – to make money when a stock falls. The trader can either buy a Put or sell a Call, if correct both makes money, however there are some differences.

Here is the difference between shorting a call and buying a put:

On paper shorting a Call has unlimited risk and limited profit and buying a Put has limited loss but unlimited profits.

For example:

Today 11-Jan-2017, at 11.09 am, INDUSIND BANK LIMITED stock is up by 4.54%. It is quite obvious that lot of traders will be trading this stock in Equity, Options and Futures. Depending on their view they may buy or sell.

The current price of INDUSIND BANK LIMITED stock in NSE is Rs. 1212.50. It is quite obvious that option traders will be most active in its At The Money (ATM) Options. Proof is here, both are in the top most active option strikes in NSE website:

Most Active Calls as on 11-Jan-2017, 11.09 am India time:

Most Active Calls as on 11-Jan-2017, 11.09 am India time

Most Active Puts as on 11-Jan-2017, 11.09 am India time:

Most Active Puts as on 11-Jan-2017, 11.09 am India time

From the above here we get the ATM option premiums:

INDUSINDBK Strike 1,200 Call Option expiring on 25-JAN-2017 LTP (Last Trading price): 30.95
INDUSINDBK Strike 1,200 Put Option expiring on 25-JAN-2017 LTP (Last Trading price): 15.55

Lot size of INDUSINDBK is 600.

Trader A feels INDUSIND BANK LIMITED stock will fall as it has already risen almost 5%. He sells or shorts INDUSINDBK Strike 1,200 ONE Call Option expiring on 25-JAN-2017 at: 30.95. His maximum profit if on the expiry day 25-JAN-2017, INDUSIND BANK LIMITED stock cash price closes at Rs.1200 or below.

30.95*600 = Rs. 18,570.00

However on paper a short seller of an option loss in unlimited. Here is the calculation:

Assuming on expiry day INDUSIND BANK LIMITED stock closes at 1250. Loss of Trader A:

(1200-1250) * 600 = Rs.-30,000.00

Assuming on expiry day INDUSIND BANK LIMITED stock closes at 1300. Loss of Trader A:

(1200-1300) * 600 = Rs. -60,000.00

It is clear the more INDUSIND BANK LIMITED stock goes up from 1200 on expiry day, the more losses Trader A will have to take.

How to limit the loss?

1. Hedge the call option sold. You can learn proper hedging strategies here.
2. Trade with a plan and exit when stop loss is hit. Most traders do this but hedging is much better way to limit losses than trading naked options especially if the trade is a positional trade.

Explaining Option Buy – On paper buying an Option has Limited risk but Unlimited Profits.

Trader B had the same view that Indusind Bank shares my fall therefore he chose to buy its ATM (At The Money) one lot Put at 15.55. They both did the trade at the same time and got the rate prevailing at that time.

Lot size of INDUSIND BANK is 600. Total money invested by Trader B is 15.55*600 = Rs. 9330.00

Trader B maximum profit is on paper is unlimited and the loss is limited to the amount he paid to buy the Put i.e. Rs. 9330.00. If on the expiry day if Indusind Bank stock closes anywhere above 1220 then this put will expire worthless and Trader B will lose 100% of the amount he paid to buy the put.

Warning: This is where most traders go wrong. Predicting direction is a very though job for any trader. At the time of initiating the trade all traders feel that their view is right and they dream of making a lot of money within a few minutes, but they end up losing their money when the trade goes wrong. Stock markets can humble even highly educated and well experienced traders, but you have to learn something from your losses. Trading losses are your biggest stock market teachers. It is unfortunate that even after huge losses traders only buy Options looking to make that gold run one day, which never comes ever. After a few years of trading some option traders become bankrupts and leave trading forever. This is why you must trade with a plan, if not you will keep losing money forever.

On paper buying a put option has huge potential for profits but limited loss. Loss we have calculated earlier. Trader B maximum loss in this trade will be Rs. 9330.00.

Now let’s look at profits in the same situations almost exactly opposite of the above.

Assuming on expiry day INDUSIND BANK LIMITED stock closes at 1150. Profit of Trader B:
(1200-1150) * 600 = Rs.30,000.00

Assuming on expiry day INDUSIND BANK LIMITED stock closes at 1100. Profit of Trader B:
(1200-1100) * 600 = Rs. 60,000.00

Assuming on expiry day INDUSIND BANK LIMITED stock closes at 1100. Profit of Trader B:
(1200-1100) * 600 = Rs. 60,000.00

Assuming on expiry day INDUSIND BANK LIMITED stock closes at 1000. Profit of Trader B:
(1200-1000) * 600 = Rs. 120,000.00

A stock rarely closes at ZERO, but just to calculate maximum profit of buying a put, assuming that INDUSIND BANK LIMITED stock closes at 0 on expiry day. Profits of Trader B:
(1200-0) * 600 = Rs. 720,000.00 (Maximum Profit)

Hope it is clear the more INDUSIND BANK LIMITED stock closes down from 1200 on expiry day, the more profits Trader B will make.

Short Selling and Buying Puts can be used for hedging as well:

A lot of traders use short selling of calls to hedge their stocks against a fall. This is known as covered call strategy. Basically if a trader owns a stock and he feels that the stock may fall they can sell a call option to get some money if the stock falls. You can click here to read the covered call strategy.

Some traders do a slightly different trade. Instead of selling a call, they buy a put to protect the losses if the stock they hold they feel is going to fall. To protect their profits they buy (mostly ATM) put option. Some buy OTM puts. This is known as the married put strategy. You can click here to read about the married put strategy.

Another difference between shorting a call and buying a put is the margin requirement. Since on paper shorting an option is unlimited loss brokers block a lot of margin when a trader shorts an option to keep the money to give back to market makers in case the trade losses money. In case the losses nears the blocked margin, either the trader is asked to deposit more money in their account or the trade is squared off as a risk management procedure. With most brokers this process is automated, they do not call the trader instead just close the trade as soon as 95% of blocked margin is the loss.

However since the option buyer maximum loss is the money they paid to buy the options no more money is blocked than the money required to buy the option. However with buying options risk is the limited time. Every derivative has an expiry date, therefore an option buyer has to be correct before the expiry date to make a profit else they lose all the money paid to buy the option and its given to the seller of that option.

What Should Traders Do?

Learn what to trade when the stock markets are stable and not much move is expected in future.

Since last few days stock markets Nifty is stable and not moving much.

Here is what may happen to world markets:

• Stock markets waiting for news for, in which business sectors Donald Trump will focus more. It is obvious investments will start in those sectors. Please keep a watch on Trump policies and news.
• Dollar getting stronger is a worry for Asian markets, but since US markets are on a roll Asian markets are not falling much. But for sure it will rise depending on what Trump says after taking over.

  Do not forget that like any country America also needs business to survive, so I do not think Trump can do anything to give a negative impact on doing business with USA. He himself is a business man, for sure he will try something good.

• Demonetization effect has still not gone away. News is already in that in December quarter India’s internet companies were not able to perform well. But for certain this will have a temporary effect till end January. Things will improve from February 2017 onward.

All of the above suggest one thing – stock markets in India will be stable. They may either fall down a bit or go up a bit, but it will be a slow move in a stable way. A swift fall or rise will only come after Trump business policies get clear. This will be known only after Trump resumes office on 20th January 2017.

There is a high chance he will definitely give good singles as far as doing business with US is concerned. Once this is known investors will come in and markets will move up.

What you can do during times when stock markets are down but stable?

1. Keep buying stocks of good companies for the long term.

2. If you are an Option trader keep trading non-directional strategies as finding direction in these stable conditions is very hard. Directional traders’ life is going to be very difficult for the next few days or months. My course offers well researched properly hedged non-directional strategies.

3. If you are a naked future trader, this is not the correct time to trade naked futures. You are playing with fire. Even if you want to trade please trade with proper hedging. There is a strategy in my course which teaches to hedge futures with options in the correct way.

Speculative trading is one of the worst ways to trade the stock markets and stable times is even more dangerous. If you are just an equity trader, please hold the stocks and sell them when they are in good profit.

If you have any questions on stable stock market conditions please write in the comments section below.

There is a misconception among traders that short sellers, or short selling is bad for markets. In fact I talk to at least 10 traders everyday and 50% of them say they do not want to short sell by giving two reasons:

First reason – The margin blocked is very high by brokers and,
Second reason – It can make unlimited loss.

Well it is a misconception that short selling of options or futures is bad or unethical.

This is knowledge for those who only buy and never sell:

Who sells you the Equity, Options or Futures? They are the sellers. If no one is a seller a trade can never get completed. There has to be a buyer and a seller for the trade to be completed.

Do not forget that buyers have to become sellers one day when they decide to close their trade.

For example a trader bought an option for 80 and sold at 100 to book profits. When he bought the option he was the buyer, when he sold the option he become the seller.

Every seller has to become a buyer and every buyer has to become a seller to close their trades. When the trade is being closed they both have to change their positions.

Warning for Option sellers: On paper Option selling involves unlimited loss but limited profits. Therefore to safeguard and limit your losses, in case it happens, it is highly recommended that you hedge your sold options. But there is very conservative way to hedge the sold options and futures, which is well explained in my course.

There is also a general misconception among traders that short sellers try to bring the price down of an equity. Some even think, to bring stock price down of their competitors, some rich traders short their shares. This is not true. Whenever markets goes down it is blamed on short sellers, but the fact is if buyers are less than sellers, market or the stock goes down.

Shorting is just the opposite of buying. Those who think the stock may fall short it and those who think the stock may rise buy it. Yes sometimes the above does happen but it cannot cause a major outcome in stock markets. It can be ignored if you do not trade penny stocks. This the reason I highly recommended against trading penny stocks. Please do not get greedy and buy or sell unknown stocks even if your broker suggest you to do. Never trade penny stocks you can lose a lot of money.

Even in other businesses in the world short selling is done. For example a cloth wholesaler may sell the clothes to a merchant two months before the contract, take the money and deliver the products two months later. This is short selling.

Markets do need the short selling traders. Here are reasons why short selling is important for the stock markets:

• If there are no short sellers, there cannot be any trade. Short sellers add liquidity in the markets. Without liquidity markets are non-existent.
• Some stocks are unnecessary overpriced without any reason. These stocks may bring greedy investors to invest. It is short sellers who help in bringing the cost of these stocks down. Indirectly they help to save losses of greedy penny stock traders.
• Remember the Satyam’s story? Their financial books were fraud. Once it was exposed the short sellers jumped in and bought the stock down from 200 levels to 10. The company is non-existent now.
• Since short selling involves more risk, short sellers have to research very well the company before short selling it. In other words short sellers are very intelligent traders since they are taking more risk than buyers.
• Brokers usually recommend buying a stock but rarely give a short sell signal because they know very well, as soon as a buy signal is generated, their clients would buy the stock, but if they give a sell signal their clients may ignore.
• In a bullish market it is the short sellers who bring stability to the markets, especially when the markets become overpriced or overbought.

  Conclusion:

  There is nothing wrong in short selling, but please hedge your positions before short selling. Options are a great tool to hedge your trades. Whether you trade stocks, options or futures, everything can and should be hedged with options.

  Options were invented as a hedging tool and they should be used for that, even if you decide to trade options you can hedge them with options.

Average True Range (ATR) stop loss method is more popular among the experienced traders. In some countries like India it is also known as Day Moving Average (DMA).

Please note that MA (Moving Averages are different than ATR or DMA). Simply put, Moving Averages are calculated on the closing price of a stock on daily basis. It can go from last 5 trading days up to 200 trading days. Moving Averages are mostly used by stock traders who buy stocks for the short or medium term, not Intraday or day traders.

How Is the ATR / DMA Calculated?

The percentage of the difference between the highest point and the lowest point of daily moving averages of last few days is taken into account.

Day traders usually take last 5 days Average True Range, ATR or Day Moving Average, DMA. Some take last 14 days moving averages. Positional traders usually take last 30 days ATR or DMA.

Let us take the last 5 days ATR (Average True Range) of Nifty 50. As on today, the last 5 trading days are 29, 30 Dec 2016, 2, 3 and 4 Jan 2017:

Here is the image of daily high and low of the last 5 days taken from the NSE site:

Nifty 50 Last 5 Trading Days High Low

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Calculating the Day Moving:

90.30 + 82.25 + 78.20 + 70.50 + 37.60 = 358.85 / 5 = 71.77

71.77 is 0.87% of 8256.00 the current spot Nifty price.

Therefore if a day trader has bought Nifty Future to trade Intraday when Nifty spot is at 8256.00 his Stop loss will be at 8256-72 = 8184.00, and sell target, profit will be at 8256+72 = 8328.00. If at the end of the day the trade is in small profit or loss the day trader will exit as the trade was initiated for Intraday day trading and not positional trade.

To Conclude:

The three types of stop loss methods of Intraday or Day Trading:

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Percentage on margin blocked stop loss method is stop loss or profits taken on total money risked or blocked as margin trading for that day.

This is continued from the article on best ways to keep stop loss for intra day trading. There we discussed the most popular method called the normal stop loss order method.

In India percentage stop loss method is the second most popular method after the normal stop loss order method.

For example let us assume an Option Intraday trader has bought Options worth Rs.45,000.

The most popular is 5% profit or loss taking percentage stop loss method. 5% is popular but this percentage may differ from trader to trader, and also from one day to another.

Below is an example of a day trader taking a 5% profit or loss on margin blocked. Based on 5%, the trader needs to calculate the points he needs to take a stop loss or profit.

Assuming Nifty Option which was bought was priced at 100 when he bought it. The trader bought 6 lots:
45,000/100 = 450/75 = 6 lots buy.

In other words 75 is the lot size currently of Nifty. 6 lots buy Option premium at 100 is equal to, 6*75*100 = Rs.45,000.00

The trader wants to make or lose 5% of 45000.

5% of 45000 = Rs. 2250.00

How to calculate the stop loss so that max loss is Rs. 2250.00

2250/75 = 30/6 = 5 points.

Here is the calculation:

5*6*75 = Rs. 2250.00

Therefore he keeps the stop loss as per his calculation of 5% max loss on margin blocked at 100-5 = 95.
And he keeps the profit taking target at 100+5 = 105.

Another easy way to calculate this is, just take out percentage of the premium price and keep the target or stop loss.
5% of 100 is 5. So keep profit target at 105, and stop loss at 95.

Please note that this point may change as per the premium of the Option.

For example if the Option premium was priced at 50 when he bought, the results of the percentage on margin block stop loss method will change. Assuming he is willing to trade with the same amount.

45,000/50 = 900/75 = 12 lots buy.

In other words 75 is the lot size currently of Nifty. 12 lots buy Option premium at 50, is equal to, 12*75*50 = Rs. 45,000.00

Now the trader wants to make or lose 5% of 45000: 5% of 45000 = Rs. 2250.00

Calculating the stop loss so that his max loss is Rs. 2250.00

2250/75 = 30/12 = 2.5 points.

Here is the calculation: 2.5*12*75 = Rs. 2250.00

Therefore he keeps the stop loss as per his calculation of 5% max loss on margin blocked at 50-2.5 = 47.50, and the profit target at 50+2.5 = 52.50.

If you want to calculate the easier way: 5% of 50 is 2.5.

For stop loss minus 2.5 from 50, for profits add 2.5 to 50 and set your targets.

Note that according to their experience in trading and market condition, intra day traders keep the profit loss percentage at different numbers.

For example on a very volatile day they might decide to keep stop loss at 8% and profit at 10%. Similarity on non-volatile days they may keep the profits and stop loss both at 3%. But this comes only after experience. If you are not very experienced trader and trading intra day, please keep your profits and loss small, so that even if you lose you lose less money. With time when your skills gets improved, you can vary the percentage of profit taking and stop loss.

Learn the best ways to keep stop loss in the system for intraday trading.

As soon as a demat account is opened for trading most people start trading Intraday. When you trade Intraday it is highly recommended that you keep SL (Stop Loss) in the system and not leave any trade without stop loss in system.

Why Most Traders Start With Intraday Trading?

1. Intraday trading looks very attractive because traders think they can make money every day. Fact is that they do not, in fact after trading Intraday and speculative trading I myself lost a lot of money when I started trading.

2. Brokers give a lot of leverage in day trading. Day trading is done using the MIS trading advantage. MIS stands for MARGIN INTRADAY SQUARE-OFF. It means that if you do not close the trade by 3.15 pm your broker will close the trade anytime between 3.15 to 3.29 pm. Most brokers have automated this process to reduce the risk.

Because MIS positions are not taken overnight, the risk is slightly less therefore brokers can give more leverage. In India brokers block only 10% of the required margin. For example if a stock is trading at Rs. 500 and a trader wants to buy 300 shares for Intraday trading total money required to buy the shares is 500*300 = Rs. 150,000. If traded for intraday under the MIS, brokers will block only 10% of 150,000 = Rs.15,000/-.

Why they block only 10%? Because it is assumed that intraday movement can only lose maximum 10% of the total amount not more. However if there is more loss than the margin blocked, brokers will call their customers to close the trade or add more money to their account. If the customer does not responds, they close the trade immediately. However these chances are rare.

Traders however should be more cautious when trading Intraday therefore it is highly recommended that you keep a stop loss in the system as soon as the original trade is completed.

If you do not keep a stop loss there can be lot of problems during the trade.

1. Your Internet connection may be disrupted and you may not know what is happening to your trades. It may end the day in huge loss therefore keeping stop loss in the system as soon as possible is a must.

2. Due to some emergency you may have to leave the system and with no stop loss in the system you may lose a lot of money.

3. Your computer may have issues and you may not be able to see your trades. In this case call your broker and ask them to put stop loss in your account.

Here are the best ways to keep Stop Loss in the system.

Most Popular Method Normal Stop Loss Orders

This is very popular among Indian Intraday traders. Almost every Intraday trader knows this method. This method is simple, just take a trade and keep a stop loss in the system as soon as the trade is completed.

For example:

1. Buy Stock XYZ at 95, Stop Loss (Sell) at 90, Target (Sell) at 100, or,
2. Sell Stock XYZ at 95, Stop Loss (Buy) at 100, Target (Buy) at 90.

If Ex. 1 is being decided by the trader, they will buy the stock as soon as it reaches 95 and immediately thereafter keep a Sell Order in the system at 90, to avoid more than 5 points loss. If they are wrong and the stock falls down to 90, the Stop Loss gets triggered and the order is sold at 90 with the max loss of 5 points.

The above can be done on Options and Futures as well.

Please note that Intraday or day trading margin blocked for Equity Cash, Options and Futures differs because of the risk involved.

There are two types of Stop Loss Orders.

A) Trigger Price Orders:
B) Limit Price Orders:

Here the broker trading system asks for a Trigger Price and a Limit Price.

Lets take the above Example 1 – Buy Stock XYZ at 95, Stop Loss (Sell) at 90, Target (Sell) at 100.

Suppose the trade has been taken and the trader decides to take a Stop Loss between 90 and 88, then the Trigger Price should be kept at 90 and the Limit Price at 88. This will ensure that the stop loss gets executed between 90 and 88 only.

Please note that for the Buy Stop Loss orders, the Limit Price has to be higher than the Trigger Price.

For above Example 2, Stock XYZ was sold at 95 and the trader wanted to take stop loss between 100 and 102. In that case the Trigger Price will be 100 and the Limit Price will be 102.

The above will ensure that the stock is sold between 100 and 102 not above 102.

Difference between Trigger and Limit Price

The Trigger Price is the place where the Stop Loss or the Profit Taking Order gets activated in the market and the system tries to sell or buy back the trade with the best possible buyer or seller between the Limit and the Trigger Prices. However if there is a jump, and no trade takes place in between the Trigger and Limit price, then the order gets pending and the Sell or Buy order does not get executed.

Warning:

During very volatile market conditions it is highly recommended that both the Trigger and Limit prices are entered in the system, else if only the Trigger price is entered, the order will be completed at any level below or above the Trigger Price as the trader has not specified any limits on the Stop Loss Order.

For example, if the trade was Buy Stock XYZ at 95, Stop Loss Trigger at 90, No Limit Order, Target (Sell) at 100, and if by chance a bad news comes in the stock and it suddenly falls from 95 to 71, then the Sell Trigger Order gets executed at 71 and the loss goes to 95-71 = 24 points, instead of 5 points as decided by the trader.

This mistake is being done by a lot of Intra day traders in the world. Please ensure you put both the Trigger and the Limit Order Price in the system to avoid such a situation from incurring huge loss.

Another popular stop loss method is percentage on margin blocked stop loss method.

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Learn how to chose stocks to invest using economy moat.

Here are some important things learn to chose stocks to invest.

1. Your country’s stock index has already chosen some great stocks for you.

For example in India our main stock exchanges are BSE Ltd. – Bombay Stock Exchange, and NSE – National Stock Exchange of India Ltd.

List of 30 stocks in BSE can be found here. This list may change from time to time.

List of 50 stocks in NSE can be found here. This list may change from time to time.

Now you have a handful of companies to research on, forget the rest.

Please note that in order to make it in the list of a country’s top stock exchanges, a company has to be well performing since years. No new comer is allowed in this list. A vigorous process is undertaken every year to chose the best performing companies in the list. Seats are always limited so only the best companies can get in.

2. Select 3 or 4 sectors which do businesses to retail traders.

Try not to select a sector that does business with only business houses, select sectors that does business with common people.

These businesses are known as BtoC – Business to Consumers. Do not select companies that do business in the BtoB Sector – Business to Business.

Here are some examples for you:

a) Banking Sector – In most families at least one member has a bank account in some bank or another.

b) FMCG Sector – Fast Moving Consumer Goods (FMCG). These are companies making products that are sold quickly and at a low cost to consumers either in a shop near their house or online through e-commerce websites. These things include things like food items, clothes, toiletries, over-the-counter drugs, processed foods and consumables. Almost everyone needs them to survive.

c) Pharmacy Sector – These do not come under over-the-counter drugs, but specialized medicines which can be bought only when someone shows a doctor’s prescription. These are usually costly medicines.

d) Automobiles Sector – We cannot sit at home and live our lives. We have to move somewhere to survive. As kids we went to school, when we grew up we went to college, then when we got a job we had to go to our office every day, people go on tours, visit places for business assignments, change city because they were transferred or got a new job.

80% of the times in our lives we keep moving. This is not possible by walking, we need vehicles to move. Lots of people have their own vehicles now and this sector is increasing everyday. For this reason Automobiles Sector makes it to the important sectors to invest list.

e) Information Technology Sector – Now a day’s no company can do business without computers and software automating jobs. This speeds up the data processing process and saves time. Interestingly Information Technology Sector was earlier only a BtoB (Business to Business) Sector, but in this fast changing world it has also become a BtoC (Business to Consumer) Sector. We use a lot of things in our homes where Information Technology Sector comes in, like Computers, Mobile Phones, Televisions, Stock Trading Software and many other electronic devices having some or the other Information Technology object which we ourselves do not know.

Housing sector is also important but history is a proof that it was and will be a risky sector.

Now chose one stock from each of these sectors with a great Economy Moat.

What is Economic Moat

Economic moat refers to the power and advantage a company has over other companies in the same sector. These things include:

• How large and wide is its business
• Trustworthiness of its brand name
• Competitive pricing structure
• Affordability of common man to buy its products
• High demand of its products
• Its ability to contain other businesses to surpass it and small businesses in the same sector to overpower it
• Financials and company growth
• Technology changes as per the new innovations in technology
• Networking with other companies
• Patent of their products to keep at bay rival companies to copy their production process which may have cost billions to research and make. Pharmaceutical companies are well known for doing this.

Other things also includes its financial profit history for the last 5 years at least

The companies with string Economy Moat can keep their services or products prices lower to attract more business. They can lower their prices because they make a lot of profit and are willing to attract more customers by lowering prices.

Once the research is complete you will get a list of three or four companies of different sectors to invest in. You can then start investing in them through the SIP method.

SIP method is Systematic Investment Plan Method

For example you have 10,000 to invest every month and you came out with four companies to invest.

10,000 / 4 = 2500.

Now start investing Rs. 2500 in each company every month. If any company stock goes down you will be able to average it out because with the same money you will be able to buy more stocks. The average value of buying the stock will go down too. If the price of a company goes up you buy less stocks with the same money.

Over time law of averages will come in and you will be able to make good profits in a few years.

When To Sell a Stock?

This question has not been answered anywhere but here are a few pointers.

• Sell all stocks of a company if you see its Economy Moat going down.
• If you need money for your financial goals like kids education or marriage sell the stock that has made the maximum profits
• Sell all the leftover stocks in your account when you retire and keep the money in a few debt or liquid funds. Every month take money out as per your requirements and live a peaceful life.

Make sure that you nominate your spouse or children and write a will so that your children know about your investments and are able to take it out and repeat the process written above if something happens to you. If you do not write a will, your children may not be able to know or take out the money you earned in your lifetime and it will become a waste and will lie with the investment institution. Make sure before you go that this does not happen.

Learn the difference between Ask and Bid Prices And Spreads in this article and what happens when volumes get thin in stock markets.

This month stock markets are witnessing low volumes in trading. Stock Prices are decided on the current demand and supply, and not what has happened in the past.

Let us take an example. Let say XYZ stock is trading at 515 and the first quarter results have come in beating market expectations. It is obvious that traders and investors will be willing to buy the stock and trading on that stock will get very active.

Due to good results, both the buyers and seller will become very active in this stock. If you see your trading platform you will see that it will show Ask and Bid prices.

What is ‘Bid’ in stock trading

Bid the best price a buyer, trader or a dealer is willing to buy that stock or an option at that particular time. Best price is the highest price buyer is bidding or willing to buy the stock.

What is ‘Ask’ in stock trading

Ask is the price a seller of a stock or an option is willing to accept to sell that stock or option. Best Ask is lowest price a seller is willing to sell stock at that particular time of trading.

Whenever they both match a trade is completed and then if trading volumes are high the Bid and the Ask prices both go up. This will take the stock price up. However if the demand of the stock is low due to whatever reasons, both the Ask and the Bid prices may go down taking the price of stock down.

For example if XYZ stock’s first quarter results would have come poor, the Ask and Bid prices both would have gone down as interest in trading that stock would have gone down.

Job of Market Makers

Sometimes when there is very low demand and supply market makers come into action and displays their prices. When the volumes are very thin the software does not understand and you may see huge differences between Ask and Bid prices. Like Ask at 515 and Bid at 500. Due to this huge difference trading may not take place at all.

Here is where the market makers come into action and controls the Ask and Bid prices so that trading does takes place.

Right now trading volumes are low and it is the job of market makers to check that Ask and Bid prices do not have too much of gap. These are mostly done in stock and derivatives where still they find reasonable traders trying to do trading, but due to huge difference between Ask and Bid the trade is not happening.

If they do not control trading prices, retail traders may get confused and those hitting market orders may get stocks at amazing high prices and suffer losses.

If traders keep getting confused they will stop trading and stock markets will remain stabilized not moving for years. This the market movers do not want, hence they control the Ask and Bid prices.

If investors lose interest in stock markets, no new company will come up with an IPO (Initial Public Offer). It is already happening in India since last 2 years. Very few companies have come with an IPO. It is due to IPOs new companies can collect money from the stock market to expand their business. Please note that a company does not have to give back the money to an investor who buys its stock, except when it decides to buy back a few shares. This happens rarely. A company only give dividends to its stock investors.

Dividends also comes from the profits made from the business, not money paid to investors from their pockets.

If investors do not invest in IPOs or in stock markets, a country’s economy may get hit. This the governments do not want. This is the reason when thin volumes are seen in stock exchanges governments gets worried. They either come up with statements or actions to bring back investors beck to the stock markets.

What is A Spread?

The difference of the price between Ask and Bid is the Spread. When the Spread is tight, volumes are good. However when the Spread is wide, it is for certain that Volumes are low.

Right now volumes are thin, so the Spreads in many stocks, options and futures must be wide.

It is advised that during low volumes traders should trade with caution. Even if they want to trade they must not hit market orders but try to hit limit orders only where they can decide at what price they want to buy or sell a stock.

If you have any questions please ask in the comments section.