Invested in equity shares? Consider starting business of share trading with zero cash
You are holding equity shares of companies listed on stock exchanges. Maybe, your shares are lying for years, and you have not bothered to check their prices. Or, it may be that your target price is not met, and you prefer to wait. You are satisfied with your holdings and would not consider selling them because of growth that the company/companies recording and/or dividends distributed. In such scenarios, you can still use your current equity holdings to venture into the world of share trading.
Share trading and share investment are different. While share investment is done based on the fundamentals of companies, like how much year-on-year revenue and profit expected to be generated, share trading is based on short-term market fluctuations like an expected positive news flow from the central bank to reduce interest rate which should raise prices of bank shares. Unlike share investment in which you first purchase a script, there is no such compulsion in share trading: you can first sell a script (short selling) and later buy. It does not matter to you whether the price of the script goes up or down. What matters to you is the position that you have taken. In case you go short, you profit if the price of the script goes down and you square off the position (by buying at a lower price).
Share traders consider variables like the chart of a script that tracks likes of daily/monthly/yearly price movements, number of transactions carried at specific prices. This is called technicals of the script and believed to help forecast the near-term price. One of the skills you need to learn is understanding technical analysis for which you perhaps should do a course to start with. In case you have exposure to mathematical programming, software programming, you can come out with a customized automated system based upon your models.
This is a high-risk/high-reward job and requires thorough study as evident from a standard disclosure: Commodity Futures Trading Commission, Forex, Futures, Equity, and options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in these markets. Do not trade with money you can not afford to lose. This is neither a solicitation nor an offer to Buy/Sell. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed in this document. The past performance of any trading system or methodology is not necessarily indicative of future results.
Again, it is not that you yourself need to do all the researches like preparing charts for each script by yourself. You can take help of experts and customized software. All these may take some time (perhaps at least three months to start with) and is a continuous process.
It is advised you spend at least first two months in a learning mode. Watch business channels like CNBC-TV18. Read online content related to shares and economy. Initially, start with a modest sum (Rs.1 to 2 lacs), or still better, there are good simulation programs now available that mimic real-time market. This will give you an idea how volatile the stock market is and whether it suits your profile.
There are facilities provided by brokerage houses under which one can do margin trading or trade against pledging of shares: you get a loan to carry on share trading against your equity share holdings. You agree not to sell your investment in shares (it is rather blocked by your brokerage house) against which you get the limit to carry share trading until the time you meet your obligations.
While the outcome of an intraday trading transaction is finalized on the very trading day itself, transactions under F&O have one month time which can be rolled to next month, depending upon the existing regulations. By the end of the day (in the case of intraday trading) or month (F&O), your profit/loss is decided (squared off) based on the difference between purchase price and sale price. Of course, in case you have gone long, have surplus cash, and do not want to square off, you can exercise Convert to Delivery (CTD) option. On a routine basis, this is not a practical way as experts warn against mixing share investment strategies with share trading.
Your brokerage house knows maximum loss that you can sustain under one cycle given the limit allowed to you for share trading. This is because stock exchanges impose bands (like 5%, 10%, 20% up and down for a script beyond which trading is stopped for the day). Important to understand is the concept of margin. As your brokerage house knows that value of a script say Gitanjali Gems cannot fall below 5% on a particular trading day, you are allowed intraday trading for Gitanjali Gems by depositing 5% margin (actual percentage may slightly rise or fall) which can be either through cash or value of your holdings in equity shares (pledged shares) blocked for the trade. Your brokerage house has the right to sell your pledged shares in case you suffer a loss and do not have cash balance to forfeit the loss. In other words for a shared script of Rs.100, your brokerage house pays from their side Rs.95 and ensure you keep Rs.5 from your side either in the form of cash or pledged shares while placing a new trading order.
There is a golden rule in equity investment: Don’t buy on rumors, just focus on basics. Hidden with this advice is how trading pattern of a script is manipulated by erring market participants (How Pump & Dump Works), making the process of share trading and investment all the more risky for a novice. Having said that share trading is a risky business, there are tools available to minimize risks. Like short selling of shares in intraday/F&O market while having possession of such shares in delivery form. For instance, you are holding 1000 shares of HDFC Bank whose current market price is Rs.700. Your purchase price of HDFC Bank was Rs.750. In other words, you are invested in HDFC Bank and market value of your investment in HDFC Bank is Rs.7 lacs and book value Rs.7.5 lacs.
Now, you get a limit (or loan) from your brokerage house to trade up to Rs.5.6 lacs margin as haircut value of HDFC Bank applied by your brokerage house is 20% based on current market price (or market price on the last trading day). Haircut value varies from script to script depending upon a host of factors including volatility and number of shares traded on an average trading day. Some of the scripts which are traded in very low quantity (called illiquid stocks) may not be allowed by your brokerage house to qualify for share trading against pledging equity shares. Now, as part of intraday trading, you sell (or short) 1000 shares of HDFC Bank at current market price of Rs.700. During the course of the day, HDFC Bank’s price goes down to Rs.650 at which price you squared off (in other words, buy 1000 shares of HDFC Bank). The difference between purchase (Rs.700) and sale price (Rs.650) per share of HDFC Bank is Rs.50 which is the profit from your intraday trading and total profit earned is 50×1000=Rs.50,000 (There is a brokerage charge, around 0.05% of turnover by standard brokerage houses for intraday trading, plus taxes like STT which has to be taken into account for net profit.) However, market value of your investment in 1000 shares of HDFC Bank too went down by the same amount of Rs.50,000: 650×1000=6.5 lacs from 7 lacs.
As mentioned earlier, share trading is to benefit from volatility of a script which is determined by the interaction of the forces of demand and supply at any point of time. There is no way to know how many market participants are going to place buy orders, sell orders on a particular day, particular time from which current market price of the stock is determined. Now, returning to the main discussion, you will perhaps not mind of the situation encountered for HDFC Bank transaction as you have booked profit of Rs.50 per share (excluding brokerage charges and taxes) although market value of your holdings in HDFC Bank as part of share investment portfolio has gone down by Rs.50 per share as well. It would have gone down anyway as part of daily volatility even if you had not traded in which case you would have missed Rs.50 opportunity to earn.
Now, as part of risk minimization strategy while trading, suppose the price of HDFC Bank touched Rs.750 at which you were forced to square off the order at the end of the day. As part of intraday trading, you suffer a loss of Rs.50 per share of HDFC Bank. This is booked loss and you have to adjust with your cash balance with the brokerage house or the brokerage house will have the right to sell your pledged shares to forfeit the loss. However, this time, the market value of your holdings under HDFC Bank (share investment portfolio) has gone up by Rs. 50 per share to Rs. 7.5 lacs from Rs.7 lacs when you initiated the trade. This strategy helps to ensure that there is no serious capital erosion irrespective of whether the market price goes up or down and one way you can make a synergy between your share investments and share trading for optimizing returns.
It is important not to be overwhelmed with terms like short selling, margin trading, margin, call/put, derivatives on day1. However, you still need to learn fast, and this is not going to happen automatically. Else, there are missed opportunities.