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Home » Rules for Share Market Investors: Always Cut your Losses Short

Rules for Share Market Investors: Always Cut your Losses Short

Rules For Share Market Investors: Always Cut Your Losses Short

Do you wish to invest or trade in stocks but are wary of the vagaries of the stock market? Does high market volatility deter you from buying stocks as you fear the potential risk of high financial losses? Do you think stock selection, timing the market, monitoring stock performance, trading online, etc., require considerable effort? If yes, then you may rethink it.

Investing or trading in stock markets is not as strenuous as you think. While market risks cannot be ignored, following few simple rules might help you make gains and limit your losses from share market investments. Let us understand some of these rules in successive paragraphs.

Rules for Share Market Investors

Open Free Demat and Trading Accounts

As per SEBI guidelines, you are mandated to open a Demat account for investing or trading online in share markets. A Demat account is a digital repository of your stock market securities. You can open a Demat account online at zero cost. However, to buy or sell securities in secondary markets, you would require a trading account too. Like the Demat account, you can open a trading account online as well. These days, many brokers allow you to open a free online trading account and Demat account on their respective websites.

Select the Right Broker

Choosing the right broker helps you minimize transaction costs. There are mainly two types of brokers – discount and full-suite brokers. The latter’s primary difference is that the latter provides in-depth research and financial advisory services while the former does not. Consequently, the brokerage and other costs charged by full-suite brokers are higher than that of discount brokers.

So, if you have sufficient knowledge of stock selection, trading, investment management, and portfolio re-balancing, then you may not require a full-service broker. You may open a low brokerage trading account with a discount broker and enjoy significant savings on your total trading costs.

Set Up Stop-Loss Orders while Trading Online

A stop-loss order limits your losses when the stock prices move against your expectations. As share markets are very volatile, setting up stop-loss limits may prevent you from losing significant amounts of money in stock market trades.

trading loss

There are two types of stop-loss orders – stop-loss limits and stop-loss markets. The former factors in both the price and trigger price, while the latter only trigger the security price. The trigger price is the price at which your stop-loss order gets activated. Whether you are long or short in the market, you may use any of the two stop-loss orders as per your suitability.

Compare the Subscription Plans

You may also compare the subscription plans offered by various brokers before zeroing in on a suitable broker. Some of the cost-saving features you may look out for are AMC waivers on Demat accounts, low brokerage trading accounts, nominal interest rates on margin money, etc. In addition, if your trading volumes are low, you may choose a flat-fee brokerage model instead of a volume-based brokerage model.

Avoid Over-Trading Online

A common misconception among many share market traders is that trading more will help them recover losses incurred in previous trades faster. However, that may not always be the case, and you may end up with more losses instead.

Taking Timely Corrective Action

While holding stocks for the longest possible time is a golden rule of share market investing, some stocks remain in losing positions for long periods. This may lead to capital erosion, and loss of interest had the money been invested elsewhere. Hence, you may be better off by selling the stock today than tomorrow as it constantly loses value.

Final Words

Losses are part and parcel of share market investing or trading. However, you can minimize your losses and make gains by following some of the rules mentioned above and having a planned investment strategy. Exercising due diligence, analysing price patterns, studying technical indicators, regularly tracking stock market updates, etc., are a few other things you may do to recoup or limit your losses.