Do all retail investors analyse stocks thoroughly and then invest for the long term? Not all. Many of them rely on fund managers and invest indirectly through mutual funds, while some of them, try their hand at cash trading to make quick profits. This short-term trading is based on the daily price movement of a stock mostly triggered by factors such as macro data or corporate announcements, be it of earnings, new orders, projects and special situations. And, if it is an intra-daytrade-in which traders buy and sell the stock on the same day-market participants also make use of debt to buy more stocks.
While there is a possibility of making quick gains from this, investors also face a greater risk of losing money as the fluctuation in stock prices is generally higher in the short term.
Also, traders can easily give into fear and greed as there is no conviction on the traded stock, a prerequisite for long-term investing. Needless to say, luck plays a major role in the success or failure of all such trades.
Mint spoke to a few individuals who trade in the cash market. Note that the cash market trading here doesn’t include options and futures trading in the derivative segment. (Mint does not suggest trading for the short term as it is extremely risky for retail investors.)
All the participants that Mint spoke to said they abided by the following rules: One, they did not treat gains from trading as the primary source of income. Two, the holding period lasted a few weeks to two years. Three, they set aside a core portfolio designed for the long term. Four, they re-invested gains back into the market. And five, they followed risk-mitigating practices such as having a stop-loss order in place.
Not the core portfolio
For most of these participants, the capital to trade in the cash market is only a small percentage, about 10%, of the overall portfolio.
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