Is cash trading in the stock market profitable for retail investors?

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. (Photo: Mint)
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. (Photo: Mint)

Summary

There is a possibility of making quick gains from short trades but investors face a greater risk of losing money.

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-day trade —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.

Trading in the cash market
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Trading in the cash market

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.

Nirali Shah, a 30-year old resident of Mumbai, says the income generated from cash trading is only ancillary income. “I categorically divided my portfolio into long-term investing and short-term trading. The latter does not account for more than 10% of my portfolio. I know my core portfolio can only generate wealth in the long run. Income from cash trading is only ancillary and I do not depend on it," she adds.

Ditto for Rishi Kothari from Gujarat, who has been investing and trading in the stock market for more than 25 years now. He says, “I have about 72 stocks in my universe. Of this, I have currently invested in 12-13 stocks that form part of my core portfolio. I am holding some of those stocks for more than a decade."

As to why he still trades in the cash market, he says, “Trading is part of my satellite portfolio. As I keep track of the stocks in the universe, I make use of any special situations that provides trading opportunities in the short-term. There will not be more than 25 such trades in a year."

Triggers

While all of them have been targeting quick cash in the short-term, their stock-picking methods vary: They either use technical charts or fundamentals including corporate actions or a mix of both.

Shah’s mother, 55-year-old Shilpa Shah, has been dabbling in intra-day trading since 2014. “After both my children settled down, I wanted to take up something challenging and so started to learn intra-day trading," says Shilpa Shah. She religiously attends the Ignite session (an educative session on trading) offered by Sharekhan online trading platform everyday from 8:45 am to 9:30 am. She analyses and selects stocks based on the information gleaned from these sessions.

Abhijit Yelegaonkar, a full-time trader, is into swing trading for the last 5-6 years. He uses both technical and fundamental metrics to pick a stock for trading in the cash market. “I look at the stocks with 52-week highs, volume spurts and open interest (OI) spurts data that NSE discloses every day. I also look at multi-year or multi-month breakouts using technical charts. On the fundamental side, I check the valuations of the stocks and also whether the company is profitable or not," he says.

Yelegaonkar belongs to the camp of investors that firmly believes in technical analysis. To exit a stock, he depends on charts such as ascending triangle breakout and rectangle breakout to set targets.

Chirag Mahawar, a 27-year old, doesn’t believe that trading has much to do with science. “I don’t think technical analysis is any definitive science. Otherwise, I would have earned endless money from this and would have never failed. Markets can be more irrational than the time I can be rational," he says. Mahawar adds that he first tries to understand a good stock idea fundamentally during the weekend and enters only when the time is appropriate.

Some of these participants also use the leverage in intra-day trading. This is called trading on margin. Day trading on margin allows traders to borrow funds from a broker and buy more stocks than they can afford to. The leverage can amplify the returns generated from trades but can result in bigger losses if the bet goes wrong.

Most participants believe that taking leverage is either risky or that the current Sebi norms on margin requirements make it unattractive.

Not without losses

Note that even those well experienced in the markets make losses. The ratio is higher when it comes to trading, either in the derivative market or the cash market.

While the participants shared that they make net gains (gains minus any loses) from their trades in a year, none of them is an exception to incurring losses and experiencing the mental stress that comes along with it, at least in the beginning phase of trading.

One such participant initially borrowed money from his father and made losses. He said it was a pretty bad experience and defined the moment as the cost of learning the markets.

Mahawar explains the reason why he decided to stop intraday trading. “The risk reward is skewed in the case of intraday trading. There were behavioural changes—being glued to the screen, greed of earning more, inability to concentrate on anything else and thinking about positions all the time. When I noticed these changes, I began to realize there is more to life than just earning money through stocks."

While losses are inevitable, most of these participants have put in place certain risk-minimizing plans to cut down the extent of losses.

Mahawar now trades in the cash market only when he finds good opportunities but with a strict stop loss order—an order placed with the broker to sell the stock once it falls by a certain percentage or to the specified price. Having a stop-loss order and sticking to it is essential and helps in not succumbing to the thought that the stock price may go up after some time, say experts.

Over the years, Kothari practiced the art of admitting to his losses and exiting the stock the moment he realizes his thesis is wrong.

Yelegaonkar, too, knows the importance of stop-loss orders. “I maintain a journal for all my trades. It includes the reason for buying the stock, the chart pattern observed, target I set and whether it worked or not. One can only learn from experience" he adds.

“Also, one should define the universe of stocks to trade. Ideally, one should stick to highly liquid, well-known stocks and trade in them" says Vikas V Gupta, chief executive officer and chief investment strategist, OmniScience Capital. Having said that, he believes that retail investors should stay away from trading in any form any day.

Prashanth Bisht, deputy CIO of True Beacon asks traders to be cautious of the costs that they would incur.

“Transaction costs are higher (in cash market) compared to F&O, so it will eat into a more significant chunk of profits made," he added

It is also important to have a portfolio approach rather than an individual stocks approach. Paying heed to how the overall portfolio is performing rather than focusing on the outperformance or underperformance of any individual stock is important, as per experts.

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