A Guide for Beginners to Profit From Trading

A Guide for Beginners to Profit From Trading

Many newcomers to the trading world hope to make a profit on their investments. However, because they are inexperienced, they are exposed to being caught in the thick of the industry’s complexity. The purpose of this essay is to guide beginners through the complexities of stock market trading and investing in order to help them achieve their goals.

According to a Zerodha post, 95% of traders lose money, with only 5% of them succeeding in controlling the beast that is the stock market. However, the statistic may be on the brighter side for investing, as the buy and hold technique works most of the time in investing due to the inherent nature of share markets that are likely to move up, but it is still not promising. With that in mind, let’s take a look at some of the most common beginner errors —

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Hearsay Investing

This is how a typical new stock market entrant’s journey begins. During lunch hour chats in the office, one hears someone talking about stocks and how a certain firm is positioned to perform well in the future and the prospect of the company appears excellent, prompting one to make their first investment.

Other examples of hearsay investing include a broker advising on which stocks to buy or invest in based on the news of a large investor who recently invested in a company. There is no research involved in this type of investing/trading, and one is most likely to lose money in the long run.

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 Mistaking a Strategy Or Setup for a Holy Grail

Most individuals waste a lot of time looking for the right setup, technique, or signal, and they lose a lot of time trying to find the best method that produces money in all kinds of markets. However, no approach is perfect, and losses are unavoidable. It’s crucial to remember that trading/investing is about much more than the trade setup. It’s critical to have a successful setup with a positive expected return, but it’s not the sole requirement for making money in markets. Position sizing, risk management, money management, and trading psychology all play a significant part, if not the most essential.

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Taking the Losers into Account and Letting the Winners Go

This is perhaps one of the most prevalent errors that most people make, and it is not limited to newcomers. Even those who have spent a significant amount of time in the market make this error. A stop loss is required for every transaction or investment. If a trade or investment isn’t functioning, it’s important to recognize that it didn’t work and register a loss before moving on to the next one. Continue to stay on to those assets that are working in your favor until the trend changes and there is no need to have a fixed aim.

The majority of people do the exact reverse, holding on to losers while taking early profits on winners. The Yes Bank tragedy is an excellent example of this: after the management difficulties appeared, institutional holdings continued to decline while retail holdings increased as the price continued to fall.

Little Understanding of Position Sizing, Risk Management and Money Management

Other than having a profitable setup, there are several elements that are required for effective trading or investing. One must place equal focus on sizing individual bets and risk management at all times, i.e., if the trades do not work out, one must be willing to accept losses and the losses must be small enough to keep one in business.

System Hopping

Another common blunder made by most beginners is failing to stay to a method for an extended length of time. One believes they have discovered or constructed a profitable system and has started to profit from it. However, when a number of the system’s transactions fail, one begins to assume that the system isn’t good enough. People reject the system and begin looking for a new one, and the cycle continues.

A system is not determined by a few trades. It is necessary to consider the situation in the long run. Before you discard a strategy, see how it performs over a hundred trades or more (system should be proven to have positive expectancy in first place based on backtest).

Now that we’ve covered the most typical mistakes, let’s look into SIP in Index Funds, the most undervalued equity market investment strategy that has the ability to outperform the great majority of fund managers.

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What is Index

An index is a collection of equities that have been given a specified amount of weighting. For example, the Nifty 50 index has the stocks of 50 large-cap businesses from 13 distinct sectors, each of which is given a certain weightage.

Reliance Industries, for example, is a part of the Nifty 50 and has a weightage of 11.17 percent. In the Nifty 50, HDFC Bank has a weightage of 11.21 percent. The Nifty 50 index rebalances semi-annually, ensuring that the well-diversified large cap corporations are automatically included.

Similarly, there are many such indexes, such as Bank Nifty (which includes banking stocks), Nifty midcap index (which includes midcap firms), and so on.

Index Fund

An index fund is a form of mutual fund or exchange-traded fund (ETF) that invests in securities that correspond to the components of a certain index, such as the Nifty or Bank Nifty. As a result, an index fund would effectively perform the same as the index (barring for the costs associated with managing the fund).

It’s difficult to predict which stocks will perform well in the next years and which will not, but based on past performance, the index will almost certainly perform well in the long run. And index funds that closely track the index’s performance will do well as well.

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Advantages of Index Fund

1. Index funds have low fees since the equities to be purchased must be the same group of stocks with the same weightage as the index.
2. There isn’t much research to be done, and there isn’t any active trading to be done.
3. Investing in index funds guarantees that your portfolio is properly diversified and that you don’t have too much exposure to a single stock.

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There is no such thing as a good or bad moment to invest in index funds. The key is to keep your investments for the long haul. Since the establishment of the Nifty 50 index fund in 1996, here is an examination of what would have happened if one had invested in the Nifty 50 index fund through a monthly SIP. Except for two cases, this simple analysis reveals that any random 10-year period would have returned a good 10% + CAGR. It would have produced a 14 percent CAGR on average.

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