Wednesday, September 16, 2009

Survival Kit For Newbie Investor - Capital Management

We understood the value of own capital in the last post ( ). Money invested in the stock market is your hard earned money. Preserve it with all your power of will and wit, because believe you me, its a jungle out there where might is right. If that is fully understood then lets go right ahead and enunciate few golden rules of Capital Management in stock market.
  • Rule #1. The capital that you employ in stock market should be from your disposable income. Under no circumstance should you violate this rule. This means that you should not ever take loan to finance your trade. To drive home the point let me remind you that investors had taken huge loans from financial institutions ably aided by broking houses for the much hyped and overly priced IPO of Reliance Power. And they got bust! That is not to mention the plight of investors in Gujarat over this IPO, indulging in the grey market trade.
  • Rule #2. In any single trade never commit more than 10% of your capital. In case it fails then you will not have to spend sleepless nights over it. And you will be in a fighting fit condition to recoup that loss in other trades. But just imagine if you were to commit 80- 100% of your capital in a single trade and it fails. You will be wiped out of the market for good.
  • Rule #3. Initially make it a habit to take out the profit you earn from stock market and keep it in separate bank account not linked to your trading account. You should keep on siphoning this profit till it equals the amount of your initial capital employed in stock market. For example you have done an initial investment of Rs 1 million. You should take your profit out of your trading platform till your profit equals Rs 1 million. Then you are mentally free to trade the market since you have fully secured your initial capital in this manner.

Rules enunciated above are to be adhered to in letter and spirit. You may crib about these rules since they may curb your style, but they are a must for your long term survival and success. Let me assure you that if you take few right decisions now, it won't take you more than a year to accrue profit equal to your initial capital employed. And imagine a scenario only one year down the line when you are trading in the market with your initial capital fully protected by following Rule #3. You will have the psychological advantage to go aggressive in trade and make killings after killings. Of course those killing trades will have to be entered into with proper protection of stop loss order. Always remember to put on your protective gear, since its a war - a jungle war! Next post we shall evaluate the efficacy of this protective gear called Stop Loss Order.

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