Basic Rules of Stock Market

Basic Rules of Stock Market

1. Your general theme shouldn’t change. If you start bending or breaking your regular theme and can’t justify trades, then you are switching from investments to gambles.
2. Risk is perspective. It’s also relative to your understanding of the industry you’re investing in. The less you understand about a business, the more dangerous it becomes.
3. You don’t need to know the entire market to make money. You only need to know a very tiny portion of it very well.
4. If you mistake your luck for investing wisdom, you’re going to lose your money as fast as you made it.
5. If your emotions begin taking over, you’ve lost.
6. Patience almost always wins out.
7. Over 95% of institutional funds do not beat index trackers.
8. Intraday/daytrading doesn’t work. If you look at the successful companies of today (Netflix, Apple, Intel, AMD, Nvidia, etc) you’ll see that they took a good deal of time. Anybody with a name on Wall Street does not day trade. All the advertisements you see over the internet are about day-trading. That tells you a lot.
9. Betting on what happens the next day or the next week is a flip of a coin. Remember your odds.
10. Using your margin to trade is a privilege. Having a margin call is a nightmare. Know why you’re using it before you decide to dip into a loan.
11. The best disciplined can be down 30% temporarily. The luckiest can be up 30% temporarily. Eventually, the lucky lose and the disciplined stand on top. Time erodes variance and guesswork.
12. Readjust your portfolio with good reason. If your theme for trades are changing, justify it.
13. Criticize what you’re doing. Peck at the holes of your overarching thesis. Whatever arguments for a company you think are weak, research them. What is being talked about is usually useless. What isn’t being talked about might be critical new information later.
14. Options and futures trading is supplemental. Using this as your primary mode to trade is dangerous.
15. If you are speculating, use money that is very small in proportion to the size of your portfolio.
16. People will tell you to diversify. However, almost all of the money is made in concentration. The reality is far more interesting than anybody’s word.

1. Penny stocks are dead fishes, invest/trade in quality stocks.
2. Research shows that among all day traders, nearly 40% day trade for only one month. Within three years, only 13% continue to day trade. After five years, only 7% remain. Beware while playing intra day.
3. Traders and investors are 2 strangers.
4. Maintain different accounts for investing and trading. Never mix it together.
5. Buy on rumor and sell on news.
6. Never lose your money.
7. Never forget rule number 6.
8. ‘Stop loss’ could be the trigger to save you from a complete destruction. Learn the power of it.
9. Portfolio is the penalty you pay for your ignorance. Stick to a handful of companies which you can easily manage and keep track of.
10. Never do intra day trading based on published news. Because it is available to every investor. Often insiders will be dumping when you will be buying based on news. Don’t believe me? See yourself what happened to HDFC bank shares after they published Q4 results on 20th April, 2018 with more than 20% profit up! Normal people like us tend to buy when a firm makes extra ordinary profit, but that is the point where big fishes sell. 

There are so many points for this answer In my mind, I will try to explain as much as I can according to my knowledge and experience.

I said so many times that when I started trading on my own, I made so many mistakes while trading, but the best part is I always learn so many things from that mistakes, and now here I am today. So I am sharing some basic points and then I will guide you for further rules which you can follow further in your trading:

1. Choose the right broker (I preferred ZERODHA).
2. Trade with your own money (don't take loans or depth from friends or relatives).
3. Always start with paper trading instead of your real money.
4. Always take a calculated risk.
5. Don't overtrade.
6. Don't be sentimental or emotional or greedy because the market will not understand your needs or emotions.
7. Don't do revenge trading after the loss.
8. Don't trust the rumors or don't trade on based on that.
9. Start learning before you want to start trading practically in your account.
10. Do enough research on the particular stock or sector before investing.
11. Most important- Be patient while trading.
12. Never start with the only expectation of profits.
13. Set the goal and stop-loss after entering the trade, and after some profit, if you want to minimize the loss and maximize the profit then use a trailing stop-loss strategy in your every trade.
14. Never average the losing trade.
15. Never trade in any stock on Quarterly result day.
16. Whenever you feel that you want to hold the position but lose in going on, you can use the Hedging strategy instead of Stop-loss.
17. Don't invest your all money in one stock/sector, diversify your investment.
18. Always keep a financial backup.
19. Don't stick with intraday trading because the highest risk involves that.
20. Most important- Never invest money which you need right away.

These are some advanced rules which you can follow further:

KYC (Know your Company):

The first step to any investment should be to know where you are putting your investment into. The company you are putting your money into should be strong on fundamentals. Going with the current trends, almost all IPOs are giving good returns on the very day they are listed. IPOs can be a reliable method to make money in the short term provided one has done an ample amount of research about the company.

Rise when it falls:

As a very common human psychology reads "When danger strikes either one fights or flights", the same is the case with investor sentiments. Around 80% of the investors pull out of the market (flight) when it tumbles down, they are the ones who have already lost some of their money. The rest 20% are the ones who go short with their trades and also the ones who put in their money when stocks are at their lowest.

Keep Calm and Wait:

Not losing your calm is like one of the key gospels if you really want to be a long-time player in the trading world. If you lose patience very often then stock trading is not meant for you and you are not meant for it. There may be times when continuous days will pass when you make no money instead just lose a part of it but don’t panic in these times, wait for the right moment to make your move. Long-term equity trading can give an average of at least 7% returns. In recent times, several stocks have given returns as high as 24%.

Know the world around:

If you feel that just knowing the business world news you can manage to earn money in stocks, then you are in real deep waters. In the ever-connected world, some factors can drive the stock markets to go for a roller-coaster ride. Taking the example of DGMO’s press conference regarding the surgical strike by India on Pakistan, BSE Sensex toppled by 1.6% or 500 points, the highest fall in the last three months. Recently issues like North Korea’s missile tests and Indo-China Doklam stand-off had led to swings in the stock market.

Don't use leverage:

This should be the most important golden rule for any investor who is entering fresh into the world of stock trading, never use borrowed money to invest in stocks. Even if you want to start investing, Rs 1000 of your own is okay but not even in one’s dream one should think of investing using borrowed money. This learning can save you from the ghastly stage of bankruptcy if even by the whisker of a chance you lose all your invested money.

If you don’t want to invest that much time in all these processes of learning then you must contact some Advisory who can appropriately guide you. They analyze stocks and find the proper strategy for each stock for you. Finding a genuine advisor is the most common problem nowadays. I am following a SEBI Registered Advisory which is Eqwires Research Analyst. They have given the best result to me. In India, there are thousands of unregistered advisory companies and tips providers. So just be careful and follow only reputed advisers and follow any advisor after doing proper research about them because it’s your hard-earned money after all. So please be aware and do safe trading.

1. Never deal with unregistered brokers/intermediaries:

When trading or investing in the stock market, you have to be very careful in choosing the broker. Check the background or reputation of the broker before opening an account.

2. Never take decisions based on rumors:

Your decisions must be based on proper research. You have to be in touch with the markets all the time to know which factors affect the market and in turn your stocks. Constant monitoring of the company whose shares you trade is very essential to make the best move. Take your decisions based on strong evidence backed by research reports and the right information from the right source.

3. Choose the right stocks:

You have to select highly liquid stocks otherwise you will be stuck in your position and will face losses.

4. Take calculated risks:

You have to take risks in accordance with your risk potential. Understand your commitments and dependants, take risks wisely. You can only lose money that which you can afford to lose.

5. Don’t be greedy:

As a trader, you should not be in a hurry to make more money in a short span of time. Watch the markets and price movements carefully and then decide. Take expert opinion as well.

6. Never be emotional:

Be practical and have realistic expectations. Don’t ever make decisions because of emotions.

7. Do thorough research:

Always do a proper study of the companies, their balance sheet, future business potential, and the global and national factors that would affect the company’s revenue or image.

8. Use stop loss:

This is one of the best ways to reduce your loss and thereby retain the gains you have made. You can fix stop loss for your stock wherein your stock will get sold off when the price hits the particular stop loss level. Employ stop loss in your trades to reduce losses.

9. Hedge your positions:

Any economic or political event may shake the market. Therefore, it is important to hedge your positions.

10. Redressal of grievances:

You must not hesitate to approach the concerned authorities in case of any grievances. Before you start online trading or investing in the stock market, you should read a lot of books regarding market behavior.

Everyone needs to understand the following :

1. Share market is unpredictable.
2. Share market works on the principle of the Zero-sum game. Your profit is some one’s loss .
3. Invest only that much which you can forego.

From my Experience of losses, I would sum the following golden rules to be followed.

1. Intraday trading is not recommended.
2. Do your fundamental analysis before investing. Learn and observe some financial parameters like p/e, Cash flow, Promoter share, Profit, sales etc.
3. Never trade on recommendations or rumours.
4. Don't invest total amount in a single or few stocks. Distribute the amount.
5. Always put a stop loss.
6. Follow news on a particular stock or sector.
7. Don't average a stock unless it is fundamentally good. That too if it falls considerably. Say to 80% of your purchase value.
8. Don't buy a stock Just because a stock is touching its 52 week low. Fundamental analysis is a must .
9. Avoid options and futures as much as possible.

10. Invest only a certain percentage of your savings

11. don't borrow and trade.

12. Exit after a considerable profit. Don’t be greedy. Trend reversal happens.

13. Study the support and resistance of a stock.

14. Avoid stocks at 52 weeks high unless there is a breakout

15. Stay away from operator driven stocks.

16. avoid penny stock . In case you still want invest very little amount which you are ready to forego.

17. If you have done your analysis properly , have patience .

18. Stay quiet in a volatile market .

19. Money not lost is money saved.

One can come up with many rules, my basic rules are:

• The stock market is not about luck, nor is it a gambling den, a lot of serious efforts go into investing in shares
• Always buy what you can understand, if it’s too difficult to understand you’ll never understand why you’re losing money either
• When you invest, it’s your money at risk, always remember that
• Buy shares cheap and sell them when you make good profits, no share can give you fantastic profits year after year. By the way, selling is the toughest part !
• Avoid intra day trading, if you are not watching the markets continuously
• Study your investments and keep your eyes and ears open for developments in these companies, information is all around us, just that we do not realise it
• Stock markets go through cycles, if you cannot stomach the down times, find safer investments
• You do not make money in every trade, but your profits should be more than enough to cover your losses
• Shares beat inflation in the long run

1. Don’t forget your discipline - Learning the basics is easy. Most traders fail due to a lack of discipline, not a lack of knowledge. Maintaining stop loss is one of the key discipline parameters to be religiously followed.
2. Don’t chase the crowd -
   Listen to the beat of your own drummer. By the time the Crowd acts, you’re probably too late…or too early.
3. Don’t break your rules -
   The first and foremost rule of share trading is to never borrow capital to invest in the share market. Test your trading setup and its logic through paper trading or backtest it with the available data. Then start with small quantities or a single lot etc. So don’t break the set rules, you made them for tough situations, just like the one you’re probably in right now.
4. Don’t believe in a company -
   Trading is not an investment. Remember the charts and forget the press releases.
5. Don’t count your chickens -
   Profits aren’t booked until the trade is closed. The market gives and the market takes away with great fury.
6. Diversification of portfolio -
   Do not put all eggs in one basket.
7. Don’t expect to make a profit every day -
   If you consider that you can make a profit on every trade, you are 100% wrong. Always be flexible and accept the fact as soon as you realize that you are on the wrong side of the trade. Simply exit the trade without changing your strategy during the market; it may cause you double losses. Always follow stop loss. Treat trading as a BUSINESS and Earnings (profits) & Expenditure (losses). Learn to like losses as they are part of the business.

1. Never take decisions based on rumors: Your decisions must be based on proper research. You have to be in touch with the markets all the time to know which factors affect the market and in turn your stocks. A constant monitoring of the company whose shares you trade is very essential to take the best move. Take your decisions based on strong evidence backed by research reports and right information from the right source.
2. Choose the right stocks: You have to select highly liquid stocks otherwise you will be stuck in your position and will face losses.
3. Take calculated risks: You have to take risks in accordance to your risk potential. Understand your commitments and dependents, take risk wisely. You can only lose money that which you can afford to lose.
4. Don’t be greedy: As a trader, you should not be in a hurry to make more money in a short span of time. Watch the markets and price movements carefully and then decide. Take expert opinion as well.
5. Never be emotional: Be practical and have realistic expectations. Don’t ever take decisions because of emotions.
6. Do through research: Always do a proper study of the companies, their balance sheet, future business potential and the global and national factors that would affect the company’s revenue or image.
7. Use stop loss: This is one of the best ways to reduce your loss and thereby retain the gains you have made. You can fix stop loss for your stock wherein your stock will get sold off when the price hits the particular stop loss level. Employ stop loss in your trades to reduce losses.
8. Hedge your positions: Any economic or political event may shake the market. Therefore, it is important to hedge your positions.
9. Watch for Warnings Big losses rarely occur without multiple technical warnings. Traders routinely ignore those signals and allow hope to replace thoughtful discipline, setting themselves up for pain. In short, keep an eye out for early signs that market conditions are changing and creating risks to your positions.
10. Diversify to Control Risk: It’s good to be brave and concentrate your investments in 3-5 stocks if you have the stomach to weather the losses in 2 of them. But diversification has always been a safe and profitable strategy. Diversify to control the risk of permanent capital loss in a few stocks.
11. Don’t Buy All At Once: Turning all your cash to gold at once can be wonderful, but turning all your cash to stocks at once can be dangerous. Stagger your stock buying over a period of time, even if prices are rushing towards their new highs.
12. Do Your Own Homework: Do your own homework before buying any stock. Do your own homework before buying any stock. Do your own homework before buying any stock. Repeat! Read about the business, know why it is a good long term opportunity, and assess the probability of losing your capital permanently in it!

These are some golden rules which all investors should follow. Most traders fail to tap their full potential, eventually cashing in their chips and finding more traditional ways to make money. Become a proud member of the professional minority by following classic rules designed to keep a razor-sharp focus on profitability.