Role of Stop Loss Tool in Stock Trading

‘Stop Loss’ order is a very important tool for online trading in stock market. It is just like an Insurance to protect you from a great loss in extraordinary circumstances of extreme fluctuation in price of your traded scrip at any time during your market hours. Particularly for a Day Trading, SL is must. Day trading is always risky just as a pearl diver’s diving in the ocean. This tool of the system is like a cylinder of oxygen to provide you the shield against sudden disaster of abnormal collapse or rise in price of your scrip.

You will be surprised to know that after you have placed your SL order, you should never think that you are cent per cent safe. Even after a SL order, you may suffer an unbearable huge loss. Sometimes, the bid or offer price strikes your trigger price and converts it in an open order as per the system, but if there is no any buyer or seller (whatever the case may be) in-between the gap of your both prices, you will lose your priority and you will wonder why your order is not executed.

Thus, your SL order is not a guarantee to protect you from possible greater losses all the times. In the circumstances when your SL order converts into normal order after hitting your trigger price, your presence must be there to quote the market price to square off your trade immediately or you should have authorized your Broker/Operator to do so on your behalf. In case of your absence at the moment, you may adopt some safer precaution to maintain a reasonable gap between your sale/purchase prices and trigger price. The size of this gap depends on many factors such as volatility, price movement and difference between best buy and sale prices. It is better not to undergo any trade in case of you are out of touch from the market for any of your reasons.

 

Whether PE ratio is enough to justify investment?

This precise Article on stock trading is the tri-sectional combination of my experience, acquired knowledge and Intuition. My Readers may be, possibly, more knowledgeable in stock trading rather than me. Even though I dare to put my ideas particularly on P/E ratio, relied upon the most by investors and analysts as one of the important factors to ascertain a quality stock. But, in my opinion, to emphasize this only tool is not wise for a better choice as it may prove to be imperfect just as in a folk story of “Blind men and an elephant”.

Price-Earnings (PE) Ratio is a primary indicator of how much a particular stock is cheap or expensive to deal in or compare with having similar price or sector. Its calculating formula is as PE=Market Price/EPS. In simple way, you may say how many times more the price you pay to earn INR 1 or a unit of any other currency. But, to rely upon P/E solely is risky. PE ratio only can never give you a clear picture of company’s performance. You should take into consideration some other profit indicators also while putting your money into a flaming (!) stock market.

Just to maintain spread of the topic, I’ll continue on the tool of PE only. Base figures of Market Price and EPS (Earning per Share) are authentic but not too effective in this calculation. Market price changes every minute, day or month. Similarly, figure of EPS also fails here as it may be of the previous year/quarter ending. Some analysts calculate average of past four quarters and in modified way past two and two future quarters with projected EPS. What it may be, but it is very clear that EPS figure is delusive and market price is always unsteady.

PE may be a good indicator to start searching a good company but not always a fool-proof tool. PE is the result of past figures and market price is variable aiming to future sometimes. Any company’s EPS may be poor, but its future growth may be bright and this factor may provide fuel to move its price to higher side. EPS of some companies may look lucrative like mirage in desert in case of their other income occurred due to the sale of the assets and they inflate their profit figures highly.

For most of the people, stock trading is their part time activity and it is not possible for them to investigate any stock in its depth. Studying fundamental and technical analysis is the job of the Analysts and Fund Managers. My aim of this brief Article is just to warn investors not to follow PE blindly. They should not overlook other factors such as stable growth, steady profits, regular dividend payments, ROE (Return on Equity), PEG (advanced to PE), Book Value etc. over and above EPS and/or PE.

Regards,

– Valibhai Musa

 

Strategies in Bearish Stock Market

In recent days, we have observed that Indian and non-Indian stock markets are not stable in their usual standard ranges. Constant little ups and more downs of the markets have compelled the most of the investors and/or traders to re-think whether to quit market with whatever the loss has occurred or increase investments still more to bring down costs of their holdings. Financial experts have proved themselves wrong in their predictions and Governments worldwide also have failed to save the markets from falling down leaps and bounds in spite of their supporting packages declared and all round measures taken. Market has become so sensitive that every second of the day increases the pulse rates of even giant players who deal online, sitting and staring towards their live market-watch all the times.

In such uncertainty of the stock-markets, nobody can show a hundred per cent successful remedy to cope with the worst situation. A well-known word ‘disclaimer’ is used here in this field the most presently as the loophole or escaping window by even the prominent Experts and Fund Managers. My attempt to put my ideas over the subject of this Article have resulted from my long experience in this regard and my consultation with, my not nephew but son, Aasif Musa in States who  graduated from Michigan University in subjects related to our topic, a talented and genius young man of 25 in area of his work. To be frank, he has no any work experience of trading in stocks, but the very first company which he had joined after studies was pleased to greet him with high distinction among his analyst peers. We had mutual discussions through emails and just as our joint findings, I try to represent my/our counseling to the members of my blog family who might have involved in dealings of stocks.

For the recent declined stock markets, Mr. Aasif points out mainly two factors – one, worldly economic growth is slowing; and two, hedge and mutual funds are experiencing redemptions from their investors and hence they are forced to sell stocks to make payments to them on demand which is a principal cause for severely depressed prices. I add one more factor from my end and it is Psychological. Hearsays and rumors, irresponsible forecasts based on hypothesis, live stock market news reports during business hours and predictions of Astrologers or Futurists develop a mass mind to think over the downward trend of the market seriously.

Here, I am not going to give you any specific list of Dos and Don’ts related to this business. In this brief Article, some very important measures are suggested in the prevailing bearish tendency of market. You will excuse me if I also use the word ‘disclaimer’ and repeat my statement in spite of my clarification above that this is merely a counseling and not any guaranteed advice. My Readers are requested to follow their own intuition applying analytic intellect prior to come to a specific decision.

First of all, the investors should think about their funds invested whether they are interest bearing or their own. If interest liability is there, it is advisable that they should quit the market as early as possible. Looking towards prevailing situation of the market, it seems very clear that the burden of interest liability will trap you deeper. In view of many economists, it is now the beginning of the supposed world-wide recession and when it goes to its climax, the market position still may become the worst. Many factors are there behind it and we should presume that its recovery to the highest picks we have witnessed may take at least 3 to 4 years. Moreover, even if the funds may be your own, you must be sure that you won’t need the same till above presumed period. In both the above cases, it is obvious that you should cash the stocks and quit the market as the precaution of prevention is better than cure before you are put in an unbearable financial crisis.

Stock market is always entangled and puzzling. There are no formulas to be followed and also fit for all the times. In my opinion, maturity built through experience and increased immune power to maintain balance with market volatility can only work. Fifty two weeks’ high-lows, discounted prices compared to issue prices of recent or past issues of primary markets, Live Tips from your Brokers or other sources, reviews of scrips in news papers, analysises of experts on TV Channels or worshiping-like (!) mentality of Charts of particular Stocks or Market Trends are not reliable tools in this tuff situation. They are lame and sometimes they may misguide or mislead you to go for improper scrips for your day trading or long-mid-short term investments. Thousands of companies are there listed on your Stock Exchanges and out of which you have to find out only 3 to 5 and I think you can yourselves do it. In my view, you should give priority to only your known companies which are fundamentally strong, dividend paying, having promoters of good reputation with their more holdings compared to public and institutional and also volume making. If such scrips are available at the fallen prices, you should go for that first. When market starts to bullish trend, these scrips will rise up faster. Promoters’ holding ratio is very important as they know their company’s inner position very well. If they start to decrease their holdings, you must get out from that scrip immediately.

Practically speaking, it is not the time now to reap any profits, but to stay continued in the field and it is enough. Here, you have to pass through an acid test and show your skill with calm and comfortable mind. You have to be very conscious to maintain your portfolio smartly. If need be, you will have to take a hard decision to convert your dull scrip to a better one with whatever loss you have to bear. Such interchange of scrips may, perhaps, not earn any profits for you, but it will surely help you to minimize your possible losses.

Mr. Aasif states clearly that in such fluctuating market, one should avoid day trading. I add to his statement and say that you should not do so even with applying ‘stop loss’ technique. You may succeed for one time, but will fail for many times and as a result, you will get nothing but loss. Even though, if you are habituated playing with such vice of prank, you should never throw your any equity having lower price to your landing cost in such dangerous horse-play where there is the great risk of going it off from you hands. Forward sale in day trading is more risky as at any cost you will have to square off your trade during the market hours. Delivery- base trading is safer than Intra-day and one may adopt this style also just to have some more time to make your trade square. If you are facilitated by your broker with BNST (By Now Sell Tomorrow) system, it is also good provided that you will have to bear Delivery base brokerage which is costlier than Intra-day’s.

Further, it is very crucial to know the right time when to take an entry to buy stocks and an exit for sale, not only to maximize your earnings but also to protect you from ill fate of losses. There is a funny quote that when people start to be terrified then you know that you are somewhere nearby the bottom. I would like to represent here the view of Mr. Aasif once again for the new entrants and also those who can afford some more investments. In his view, this is the appropriate time to buy stocks as they are very cheap and such opportunity does not come frequently. When the market returns, they will come back rather quickly; therefore, if you are not invested, it will be easy to miss the chance. Our joint counseling in this regard is that you will have to presume bottom level of particular stock or Sensex. This bottom level can be judged only after their upward rise is seen and it is advisable to wait and watch still more, no matter you miss your first or second ride.

It is most practical and safer in our view that one should start to buy stocks in parts in either of the two situations, declining still more or going up. The first will bring your landing cost lower and the second will make your cost somewhat higher, nothing else. Your purchase in installments is better than buying your total purchase at a time.

It would be a wise step if you hold a diversified set of stocks spread across various sectors. But, over diversification will prove to be ‘Much Ado about nothing.’ Warren Buffet, the richest man in the world who made his money from investment once said, “Over diversification is only good for those who don’t know what they are doing. If you are sure that you know five good stocks then have faith in yourself and distribute your money among them instead of buying thirty random companies that you know nothing about. Diversification can scientifically reduce your returns especially when you believe that few stocks will go up in price by a good percentage.”

It is noteworthy and advisable to remain apart from those sectors which are influenced with changing policies of Government as there are always possibilities of extreme ups and downs. If you go for a banking sector, prefer always those Public Banks which are under direct management or control of Government rather than Private ones. In the times of financial crisis, the Government is surely to protect them by providing survival packages which may not be available to Private Banks.

Before summing up, we represent here our some personal views which we have adopted for some ethical and other reasons. We never deal in F&O or FOREX and also avoid trading in stocks of certain companies which may be manufacturing or dealing in such products for which our conscious does not permit us to believe them as good. To buy such stocks means to be the partner of the said companies and it is totally against our principles whether we hold them for long time or even for a while. We don’t impose our above thoughts on others; but as our friendly duty, we counsel you for some important Don’ts. They are :- (1) Not to go for day trading in volumes beyond your capacity. (2) To avoid frequent trading in particular single scrip on the same day; and, (3) Most importantly, if you love your family members the most and you are not going to put those innocents in trouble by going you-yourself broke, avoid F&O trading completely as it is 100% gambling and providing you an open ground for over-trading which is risky.

Hope you will consider our views to be the last as we don’t claim being ‘Professionals’. It would be a matter of our pleasure if our aim to help you succeeds with your adoption of even a single point to make your style of trading in stocks efficient and improved.

With best wishes,

– Valibhai Musa