Become Rich Beyond Your Imagination

Power of compounding is a simple principle which can make you rich beyond your imagination. I personally know one person who used to work in a private company with a handsome salary of 15000 rupees per month in 1995, but today he is a very rich man and he is a good friend of mine. It is very inspiring to know that only two things made him so rich - disciplined investment and power of compounding. He started by investing just 1 lac and had a very simple strategy. Every year he used to wait for markets or specific stocks to correct and after correction was over he used to invest his money. After correction in the stock market, most of the stocks show a very positive rally. His idea was to invest in few selected blue-chip companies and sell all his stocks after 20 % profits. Due to the rally 20% profits were sometimes achieved in just 30-50 days but still he would not hold any shares after getting 20 % returns. The total amount received after the transaction was never touched and was kept ready for re-investment. Next year again he used to save 1 lac from his yearly income and add that into his previous total for re-investment. After correction he used to invest all the amount for another 20 % returns. Sometimes after getting 20% returns from one stock he noticed that another stock had corrected giving him an opportunity to earn another 20%  in the same year. Table below shows how exactly he accumulated so much wealth with this method. Here I consider that stocks corrected only once in a year.

Actually the amount of my friend's wealth is much more than this. It is because over the years his salary has increased and so has his yearly contribution. Now his yearly investment has increased to 3 lacs. If today someone follows this method and invests 3 lacs every year then he would reach an amount of almost 60 lacs in 8 years and almost 2.5 crores rupees after 15 years. Most of the experienced traders in the stock market will tell you that 20 % rise in stock prices after correction is a very common thing. Now the question is that why does everyone not follow this method. The main reason for it is that finding out whether correction is over is not very easy. However, if you carry out regular research on markets and are ready to wait patiently then you can follow the same path.

Short Selling : Explained

When you buy stocks its called ' long ' and when you sell stocks which you have not bought is called ' Short Selling '. Now the question that comes to your mind is how can someone sell shares which they have never bought. Actually when you short sell stocks then you borrow them from your broker. Now what you borrow must be returned too. So you have to buy same number of stocks after some time - it is called ' covering the short '. A trader short selling in futures has to buy back on or before the expiry date of the futures. If a trader has short positions in cash then he has to buy on the same day. Here stocks are sold at a higher price and bought at a lower price. So if you are buying at low price and selling at high price then it means profit. In this case its just doing the opposite i.e. selling first and then buying later.                                

 Why the word Short Selling ?
 Let's break up these words. Here word ' short ' means that trader is short of the shares that he is trading. Second word ' selling ' means selling the stocks which he is short of.                               
Here also the trader uses market fluctuations to his advantage. However, it is more risky than going ' long '. Let's find out the reason for this with the help of an example.
A person buys 1000 shares of a company called SSS at the price of 50 rupees per share. He wants to do ' Day Trading ' and expects that the price would come to more than 50 rupees per share. But near to the closing minutes of market the price reaches 47 and he does not expect the price to come to even 50 in remaining few minutes. He is under a loss of 3000 rupees so he decides not to book the losses and hold those 1000 stocks. He has money in his account and holds these 1000 stocks. The next day the price of the stock comes to 51 and he sells at a profit of 1000 rupees ( note that profit is not exactly 1000 rupees as some money is charged from broker in the form of commission fees ). 
Now on some other day same person Short sells 1000 shares of same company called SSS at the price of 50 rupees per share. He expects that the price would come to less than 50 rupees per share in that day. But near to the closing minutes of market the price reaches 53 and he does not expect the price to come down to even 50 in remaining few minutes. He is under a loss of 3000 rupees but does not want to hold decides to book the losses. This is because in case he wishes to hold the shares then he has to pay interest charged on the stocks because he has borrowed it. So holding short position for a long time can be very costly. However, in F & O there is a provision to hold stocks without any interest charged. But this can be done only till the expiry date of F& O.                              
There are other reasons too that makes Short Selling riskier :                                                                

 1. If the company declares dividend, bonus or right issue during the period you hold the stocks, then it has to be paid by you to the lender because in reality he owns those shares.

2. At the most price of a stock call fall by 100% and that too when the company looses its business and its stock loses all its value. But there is no upper limit for the stocks. So your losses can have no limits.

3. When stock prices go up a remarkable development takes place which is called ' short squeeze '. What actually happens in this is that when stock prices start rising upwards more and more sellers rush to cover the shorts ( it means to buy the stocks which were short earlier ) . This ' short squeeze ' causes huge demand for the stock as both buyers as well as sellers rush to buy the stock. When the demand for the stock rises its price also rises. So the person having short positions bears heavy losses.

4. Generally the stock prices rise. So shorting means going against the general trend.  
Short selling can give you a lot of profit especially in a bear market. But we know that no one can predict the markets. So considering the risks associated with it one must take extra precaution and must be absolutely confident before going for it. 

Good And Bad Aspects Of Online Trading

GOOD                      
        
1. Buying and selling is easier because you don't have to call anyone or go to your broker's office for trading. Just sit at your home, log on to the website and trade with the click of a button.
2. You can place limit orders. If you do not have time to monitor markets then you can place a buy and sell order of any no. of shares at your desired price. Once the stock price reaches your desired price then automatically shares will be bought for you. Later on if the stock price reaches your desired price again the shares will be sold automatically. When you check your account after an hour you will see the profits or loss.
3. Dividends are directly deposited in your trading account.  
4. All transaction statements ( present and past ) can be seen with the click of a button.  
5. Various trading softwares / tools are available which help in taking better decisions.      

BAD    
                                                    
1. Everything depends on one click. If you click at the wrong place then result may be completely opposite.
2. Internet security is a great concern. Your computer could be hacked. If somehow your login id and password reaches wrong hands then consequences can be fatal.
3. Due to technical reason you may have to bear losses without any mistake of yours. However, chances of such technical faults are rare. 
4. Slow computer speed may cause trouble in buying stocks at desired prices.
5. Stock market is very volatile. The stock prices change every second. Due to this placing an order can sometimes be very difficult. You may place an order at a price and later on cancel it after watching a different price.

Types Of Trading In Stock Market

There are three ways of trading in the stock market. These are Day Trading, Position Trading & Swing Trading. Anyone can trade in any of these ways to earn money but he must keep himself updated about the markets and the company in which he is invested. Now let's quickly understand basics of these three types of trading.

Day Trading or ' Intraday ' - In simple words it means buying and selling shares on the same day. In this type of trading main thing is to use the daily price fluctuations to your advantage. A trader generally buys shares when he anticipates the price to go up. He waits for some hours or even minutes and sells it when price rises. After the introduction of internet it has become more popular with traders. A trader can also sell stocks when prices are up and buy later when the stocks are down - ' Short Selling '. A day trader continously monitors market during trading hours and can trade any number of times in a day. In ' Day Trading ' commission fees is least & a trader can trade upto 4 times the money he has in his account. This kind of trading involves more risk but its more exciting and can turn out to be a fast earning option also. But research shows that day traders lose more money than people who buy stocks and hold for long terms. So for beginners its recommended to trade very few shares ( like 5 share of rs 50 each ) before getting hang of it and then go for large numbers. However, people who get easily exited about things in life must completely avoid it.  

Position trading - In this the trader buys stocks and holds it for some months. The trader buys stocks after proper research. He may not monitor the stock market closely during trading hours but keeps himself informed about the economic changes which could affect the market and also about the company in which he has invested. Stocks are bought taking into consideration a longer view of the company and the market. The risk involved is less than Day Trading because the trader does not have to sell stocks in a day.  

Swing Trading - In this stocks are monitored for weeks or months before trading. Although a swing trader may not spend hours monitoring the markets closely but he gives more time monitoring fundamental and technical analysis of the company. He carefully studies financial reports and profiles of the company. Most of the Swing traders study only about few certain sectors and as a result they become experts in those sectors. They are able to predict movement of stocks within their chosen sectors more accurately. This way trading becomes less risky and the trader does not have to give his full time to monitor the market. It suits people who are willing to give time to study markets and have patience to wait for good returns.

What Is The Difference Between Stocks And Futures ?

If you are new to the stock market then you must have heard words ' stocks and futures ' and wondered what is futures. One main thing to understand is that trading in futures involves a lot of risk is not same as trading in stocks.
Here is the comparison between the two :

           Still confused ? Don't worry. Now let us understand futures contract with the help of an example : Consider that this is the month of February. You have been told by your friend to trade in futures for better profits. The reason is because you will have to pay less for number of stock futures purchased and only you will have to pay ' margin money ' plus lower commission fees. This means that you can buy more shares for a lesser price. So you decide to buy futures of a stock called SSS for the month of march. You call your stock broker and ask about details of stock futures of SSS. You are told by your broker that one ' lot ' of SSS contains 75 shares and ' margin money ' per ' lot ' is 20000 rupees. You have 50000 rupees in your trading account and current market  price of SSS stock futures for the month of march is 1000 rupees. So you decide to buy two lots of SSS futures which means 150 shares. Once you buy the two ' lots ' 40000 rupees ( 20000 per lot ) goes from your account in the form of ' margin money ' plus the brokerage. Now you have less than 10000 rupees left in your account. Suppose the price of share of SSS increases by 100 rupees then you will have option of taking profit of 15000 rupees ( 150 * 100 ) by selling those two lots. Now if you sell the futures and take the profits ( 15000 rupees ) then it means that you have made remarkable profit of  30 % within a month. However, you must have noticed that the stock price had risen only 10 % which normally happens in the stock market. Now let us take the same case but instead of stock price rising by 100 rupees we consider that it has fallen by 100 rupees. As soon as the stock price falls by 100 rupees you can get a call from your stock broker. He may ask for deposition of more money as your loss has reached to 15000 rupees and that means after deducting 10000 rupees from your account you still have to pay 5000 rupees  more to pay for the loss. this kind of call is called ' margin call '. If you don't have money to deposit then either you will have to sell the futures lots at a huge loss or even the broker can ( read will ) sell your futures lots. So in this case you will have to bear a huge loss of 30 % in a month. Also it is important to note that when stock prices fluctuate a lot then ' margin money ' is increased. So if in this case you had 60000 ( instead of 50000 ) in your account but ' margin money ' per ' lot ' had increased to 25000 rupees after few days of purchasing then also you would have landed in a similar position. So it better to understand the risks associated with trading in futures before going for it.  

22 Basic Rules Of Investment In Stock Market

There are many basic rules of investment in stock market. Here is a list of most important ones which I have learned over the years through my experience.                            
1. Would you gamble in a casino without knowing rules of the game? Of course not. Same way never invest without having a basic understanding of the stock market. Stock market never forgives and has no emotions.
2. No one can time the market. Not even the best of analysts whom you may have seen on TV ,magazine or a newspaper. If they could do so they would be rich like anything and wouldn't be trying to earn by giving tips to others.
3. Overconfidence is harmful in all aspects of life. This is true in stock market too. Do not increase your investment if you have had success just once or twice.
4. Do not trade with emotions. Emotional traders lose more than what they earn.
5. Keep in mind that you cannot always be right. But remember that stock market is always right. If you short in bull market or you go long in a bear market then you are most likely to lose money. Easy method is to always follow the market.
6. Do not invest all your money in a single stock, no matter how positive the news is. Diversify your investments. This will reduce risk of heavy losses.
7. NEVER ever take a loan and invest your money in the stock market. An experienced person will never advise you of that.
8. Do not blindly trust any analyst or a trading software. People claim to have best of knowledge about a stock and they advice others to invest in a stock. But actually their earnings are not from investing in that stock but by selling you these advices. These advices can be seen in a magazine, television, stock brokers, research analysts etc. It is always better to do your own proper research. It would not take more than 7 hours in a week to find a good stock to invest.
9. Start booking profits partially when the markets are high. Do not wait for a correction. Partial profit booking means you will keep increasing your cash reserve with the rise in markets. So with lot of cash in hand, when market falls you will have a good amount to invest at low prices.
10. Cut of your losses. Also you must avoid increasing your losses by investing more and more in a falling market. It may come as surprise to most of you but most of the investors hold on to a stock when it's price is falling day after another and later on sell it at huge loss.
11. Buy at low price and sell at higher price. Most of the investors track a stock for few days and buy after its price has already risen a lot ( Overbought ). Later on they either sell at a loss are get stuck in a stock for a long time.
12. Huge sums of money have not been made by trading daily but by investing for a long term. Look for long term trends of the market and a company. Returns of 20-50 times or even more can be earned if you invest in a multibagger stock for a long term. 
Read: How To Identify A Multibagger Stock ? 
13. When markets are rising everyone seems to be bullish and when markets fall all become bearish. Best of traders are the one who don't follow others but instead look for signs of trend reversal. Imagine how much money you would have made if you would have predicted SENSEX to rise from 8000 levels in 2009.
14. Do not chase a stock. Keep cash ready and wait for the right price or invest in some other stocks. Your wait might be a long one but remember " everything comes to him who waits ".
15. Do not invest in Futures & Options without having good understanding of it or else it might be your last trade.
Read - What Is The Difference Between Stocks And Futures ? 
16. Over-indulgence must be avoided. There are too many experts in the market ( television, magazine, analysts, brokers etc. ), it is advisable to think before you act. Do not keep changing your portfolio on the basis of these recommendations. Again I would recommend you to carry out your own research before taking any action.
17. Remember that two forces that drive the market are fear and greed. When market was at 21K levels everyone seemed to be bullish. Reports were that SENSEX would soon touch 25K levels. People who could not control their greed bought more and more anticipating huge profits. Later on when SENSEX fell to 17K levels in two days, these people found themselves under huge loss. Same way when SENSEX was below 8K levels there was so much fear in the market that people did not consider it as good investment opportunity. Most of them wanted to wait for the SENSEX to fall to 6.5K levels. Unfortunately they never saw those figures and missed a golden opportunity of investing.
18. Most often stock market moves before the news is out. By the time everyone comes to know about the news, the stock price may already have moved. So if you wait to invest till the news is out you may miss the train.
19. Just like in any other field a good trader must have two qualities- commitment and discipline. People who trade in the stock market just on the basis of their luck are mostly losers.
20. Don't go for penny stocks. Certain unheard stocks rise by 20-50 % in just 2-3 days. This makes many traders to jump into that stock. However, most of the times the prices of these stocks jump on the basis of rumors and later fall more than by 20-50 %. In every bull run certain penny stocks outperforms the SENSEX or NIFTY and they are considered a hot pick by most of the traders. But when market falls these stocks are worst hit. These are the kind of stocks that can ruin all your investments.    
Read: 10 Mistakes That Causes You To Lose Money In Stock Market
21. Be very cautious when you notice that only one trend is visible. Stock market is not uni-directional. If it is going in only one direction then there are lot of chances of a sudden trend reversal. 
22. Avoid opening an account in a small local broking firm. In Jan. 2008 market fell from 21 K levels to 17 K levels just in two days. At that time buying stocks was not possible in nearly all small broking houses. This happened because people who were trading in F & O had to bear heavy losses so there was lot of margin pressure on these broking houses/ private brokers. Due to this, the stock exchange only allowed these brokers to square off the position of the current traders. Many traders had money to buy stocks but could not do so because of this problem. People who had accounts in a well established broking houses e.g. HDFC did not face this problem. Apart from this there are also many other advantages of choosing a well established broking house.

How To Identify A Multibagger Stock ?

Multibagger stocks are desired by everyone. One multibagger stock alone can earn you more money than what you may earn in years. Here are some useful guidelines to find out a multibagger stock :    

1. Check out a company which has a very good business. Also the company's business must be in a sector which has a good growth story behind it. 

2. Find out order value of the company. A company with good order value shows the business solidarity of the company.

3. Look for a midcap stock which has capability to become a largecap. History tells that many a midcap have become large caps and in the process have turned out to be a multibagger. A potential mid caps stock rises more quickly than bluechip companies. Its better to opt for a company with market capital of less than 1000 crores. 
4. Find out if the company has any expansion plans. A company must have expansion plans like increasing its turnover or diversifying its business into other sectors.

5. EPS of a multibagger stock should have increased over past few years. Find it out from its previous data.


6. Look for a company which has a new innovative idea which might have great future potential. This can be like introduction of new technology in field of education, automobiles, treatment of diseases, generation of power, agriculture, reducing global warming etc. 

7. A multibagger company usually pays regular dividends. This shows that it is ready to share profits. But if a company is paying too much dividend then you should be cautious. A company with expansion plans will not pay too much dividend and leave nothing for itself.

8. Don't ask somebody else to do the research for you. Research yourself and after picking your stock be confident in your stock pick. Stay invested for long term. Do not loose hope in your stock even if the market crashes. A stock with future potential can even go upwards in the falling market.