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Trading on the stock market is like a double-edged sword. If it works you mint money, if it doesn't you start hemorrhaging! This is particularly so in volatile markets. The opportunity or temptation to make a quick buck is maximum when the markets are volatile.

So, if you are bullish on a stock, you place a buy order at the market rate. Your cost includes the brokerage you pay for the trade. To cut out your potential loss you set a stop loss trade at say 2 per cent below your buy price. In volatile markets, stop losses get triggered in no time. By the time you realise it, your stock hits the stop loss set by you and you end up with a deficit on this trade!

I have learnt from experience that trading, without having access to real-time quotes or without the time to monitor them, can be painful. Dealers in broking outfits have the knack of ensuring that clients close out their profitable trades too early because it works in their favour. If you are placing your orders from a remote place and are dependent on your broker to keep you informed about how your stock is behaving, he will normally execute two trades- he will sell for his company if you are buying and buy if you are selling. This ensures that your loss is his profit. This is because when you square up your purchase, you put a sell order. The broker squares up his earlier trade by buying into the stock you had purchased earlier. Remember, the broker always executes his trade before yours!

In the example given above, assume the stock purchased by you moves up. You are making money but the broker would start pestering you to square up and book profits. Out of fear, most traders book profits too early and the broker is able to cut his losses. This example is only to highlight the need to avoid day-trading unless you are able to monitor prices real-time.

From experience, I have learnt that it makes more sense to own stocks in which you can trade freely without having to worry about losses. Say, you own 10,000 shares of GM.

On a particluar day, you find that the stock has appreciated by 2 per cent without any appreciable increase in volumes. You sell 5000 shares. If the stock falls, you stand to gain by covering at various levels on the downside. If it goes up, you tender the shares for delivery and get the sales value in consideration. The risk of an upside is eliminated altogether. Yes, you miss out on greater capital appreciation if the stock rises say 3 per cent (since you've sold at a 2 per cent gain).

Trading is good provided it is done safely without eroding your capital.

Learn more about this author, Dheer Kothari.
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