Making money by trading in the equity market can seem like a fun activity for some. As some traders say, the fresh rush of adrenalin triggered by ups and downs in the market can be quite exhilarating.
However, before you decide to jump on the trading bandwagon, you need to know the following:
1. No free lunch
Literally, a red carpet is being rolled by equity brokers to attract retail investors. Many are offering broking and demat accounts for free, while discount brokers have zero brokerage fees for trading. You get virtually everything for free.
However, you need to be careful. Not all brokers are transparent and scrupulous. You need to have a good understanding of the charges to know if things are really as free as they seem.
One investor who bore the brunt of poor customer service complained in the social media ‘God can be contacted. But XYZ (broker) is unreachable’. So, be aware of the pitfalls and the actual cost it entails.
2. Human biases
Psychological biases are also difficult to overcome. Sometimes, we are averse to losses or seek only that information that confirms our belief. At times we succumb to greed or get overconfident. Trading can play havoc with your emotions if you don’t have the right mindset for it.
Stay away from a financial product if you don’t understand it and the risks associated with it.
Some traders run their own websites and blatantly advertise about their success story. Their super-normal returns are often padded and their winning percentages fudged.
The moot question to ask is – if they were so successful, why don't they trade with their own money full-time rather than trying to lure you. Day trading in stocks or trading with a short-term perspective can be a riskier proposition and so is dabbling in complex derivative strategies using futures and options –without understanding it.
4. Time is money
Day trading needs time for your day. Sometimes, you might have to spend a larger part of the day just tracking markets and spotting opportunities. Moving fast can be critical and you have to give your full attention.
If you still want to dabble directly in equities, you need to take care of one key thing.
Don’t jeopardize your goal
Stakes are very high when you trade using derivative products or even direct stocks. So, it is important to secure your important financial goals first by investing towards them with more reasonable managed financial products like mutual funds across asset classes. Stay away from a financial product if you don’t understand it and the risks associated with it.
Trading, if you are so inclined despite the risks involved, is best done within limits and without compromising on your financial goals.