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Stock market trading: A Derivative of Fear and Anxiety?

Investors are often wary about losses they could make while trading in the stock market. Everyone wants to make money, but nobody wants to lose it.

However, stock markets do not function in one direction. For someone to make money, somebody has to lose it. A market is a meeting place of expectations of buyers and sellers. If the demand is higher than supply, prices are higher. If the supply is higher than the demand, prices fall.

Here are pointers that could help dealing with fear and anxiety:

·         Day trading: Stock market trading is a zero sum game. There are days when you make good money and there are days when you lose money. Like gambling, day trading is very addictive too. You should prepare your mind for losses. Ideally, you should day trade for the fun bit. This means you should set aside money you can afford to lose every time you trade.

·         Investment losses: So you bought quality stocks for the long-term, but picked them up at the peak of the stock market rally? Most retail investors tend to go with the herd. When everyone is buying, retail investors are typically the last to enter the stock market. The idea here is not to panic. Instead, you could use the fall in the stock market to buy more of those shares at a low price. This would bring down the average cost of purchase you made. For example, if you invested in 1000 shares worth Rs 1,00,000 at the peak of the stock market, your average price per share was Rs 100. Buying further during a fall, could bring the average price to Rs 80. So, you can make more profits in future.

·         Derivatives: You bet on index or stock futures and the market went against you? Derivatives are created for speculation. They derive their value from the underlying security that is a company share. If you want to bet on prospects of a company’s share, you should certainly use individual stock options and not stock futures. Unlike options, futures come with an obligation to undertake the trade in future. Traders tend to use futures as a hedge against their position in the equity cash market. However, a small investor should not follow traders who have higher stakes in the stock market. It is better to bet on the price trend by using stock options. The only risk you run is of losing the option price that is a fraction of the actual share price.

·         Value: A low absolute share price does not make a stock cheap. Nor does a high absolute price make it an expensive proposition. If you have invested in a high growth sector and you hold that stock for three to five years, you will make good money. This is because a high growth would bring in high revenue and profitability to the company. Share prices tend to follow the trend in earnings per share -- the company’s net profit per equity share. However, it is important to assess the growth prospect of a company in comparison to the overall growth in the sector. You should never buy a stock because the share price looks cheap. The share could be priced at Rs 10 but the company may not be making even 10 paisa per share in profit.


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