All investors incur a loss in the stock market. The objective of an equity investment is to gain on the net basis after adjusting the loss in the stock market. A common perception is that investor who is earning from the stock market does not incur any loss in the stock market. Let’s check what it implies if an investor says that i earned Rs 100 from the stock market. It implies that he must have earned Rs 150 and hypothetically his loss in the stock market must be Rs 50. This explanation was not a rocket science, but my objective is to explain that you cannot avoid a loss in the stock market. The end objective should be to cut loss in the stock market.
Next question which comes to a mind of an investor is how to maximize gains from the stock market. The answer is very simple either increase the gains or reduce the loss in the stock market. It’s a big dilemma to maintain a fine balance between gain vs loss in the equity investment. The reason being, it is linked to associated Risk. High Risk means more gains but at the same time more loss. I always believe in taking calculated risk to minimize the loss in the stock market & find out optimum point. Let’s check out, how you can minimize your losses
How to control your loss in the Stock Market?
(a) Stop Loss:
Stop loss is one of the most effective ways to cut down your loss in the stock market. You must have observed that all the analysts mention stop loss along with their stock recommendations. Many readers asked me how to calculate stop loss. Trust me different investors calculate differently. Though there are technical tools available to calculate STOP LOSS but nothing replace human mind. I normally keep a stop loss of 5% lower than the purchase price to control loss in the stop market. For strong stocks, i keep the stock loss of 10%. At the same time, for riskier stocks the stop loss should be 3% as they are swing trades. Some investors keep a stop loss at 1/3rd of expected gain. For example, if i am expecting a return of 12% from a stock then my stop loss should be 4% lower than the purchase price. Even when your stock is rising, you should keep trailing stop loss to protect profits. For example, if my profit is 12% and stop loss is 4% then my trailing stop loss will trigger at 8% profit. It will help me to protect profits. You may adjust trailing stop loss when you are sitting on a profit in the range of 30%-50% to take more risk.
(b) Entry Point:
It is imp to enter at right price point. Though no one can time the market but still you can make a fair judgment. A golden rule is that never buy when the stock is in strong momentum. The human psychology of being “left out” compels an investor to buy stocks in strong momentum. Trust me, each and every stock stabilizes after such out of the blue rallies. It is imp to know the reason for a rally. If you know the reason then participate else enjoy as a reserve player. Let the market stabilize before you enter. If you are a trader then check the momentum indicators and join the bandwagon. I highlighted the same in my post, How to identify best trading stocks?. By entering at a right price point, you can cut your loss in the stock market.
(c) Exit Point:
As i mentioned in my post, Book Profits in Stock Market that you should also exit at a right time. It will help to cut the notional loss in the stock market and increase your profits. When the stock is in momentum, it is the right time to exit of course after checking relevant indicators. You stay invested in momentum stocks till the steam fizzle out. As i shared in my previous posts that i have Maruti Suzuki stock. In my opinion, it is good long term trade. Recently it rallied till Rs 4750 and i sold it at Rs 4720. I booked my profits or hedged my loss in the stock market. I will re-enter at around Rs 4600. Always keep in mind the law of gravity that whatever goes up will definitely come down. Buy on FALLS and Sell on RISE. Though timing will not be 100% perfect but that is the mantra to survive in the stock market.
(d) Identify SELL Signals:
Always look out for sell signals in the stock. There can be multiple signals. In my opinion, a stock give a lot of sell signals before a sharp fall or for that matter rise. If an investor fail to pick up such signals then we cannot blame stock market. I also made few mistakes in past. We should not just stick to the fundamentals of a stock. It’s a myth that if the fundamentals are strong then the stock cannot fall. The best examples i can think is of Reliance, ONGC, Coal India etc which are most profitable companies in India. A very recent example is Adani Ports. It fell almost 30% in 5-6 sessions. This stock was giving SELL signals, but i completely ignored. If stock gives sell signals then SELL and cut your loss in the stock market. Always remember it is not the LAST STOCK in this world.
(e) Never Average out a falling Stock:
In my opinion, this is the father of all the mistakes or stock market blunders. Never ever average out a falling stock. I committed this mistake in 2008 and incurred heavy losses. I bought Reliance Communication at 800 and averaged till Rs 500. Thank god, i sold at Rs 500 else today it is trading at around Rs 70. Always remember that you don’t know the bottom of the stock. When the JP associates stock was at Rs 100, the so-called analysts were giving targets of Rs 200 and Rs 300. We love our stock so much that we think the price at which we are buying is bottom price. You should decide your lot size which should be 1/20th of your investment. Invest and then wait for it to increase. If stop loss is triggered then sell and exit. I only average out stocks when they are increasing in value at milestones like 5% profit, 10% profit etc. By doing this, i completely hedge my loss in the stock market.
Disclaimer: Among all the stocks discussed in this post, currently i don’t have a position in any of these stocks. The objective of this post is only to create an awareness.and educating investors about the Subject matter. The views and opinion expressed on this website are my personal views and is NOT an investment advice/Stock Tips whether to buy, sell or hold the shares of a particular stock. All investors are advised to consult their investment advisor and/or conduct their own independent research into an individual stocks before making any decision. I am not responsible for any loss or implications arising out of any decision taken by the readers after reading my post.
Copyright © Nitin Bhatia. All Rights Reserved.
Read more Articles:
Share this Post: