PDF Summary:41 Tips for Success in Share Market, by Mahesh Chandra Kaushik

Before you embark on your share market journey, it's crucial to have a solid plan in place. In 41 Tips for Success in Share Market, Mahesh Chandra Kaushik outlines his methodical approach to smart investing. Rather than making hasty decisions, you'll learn how to establish clear profit goals and risk limits, create a diversified trading strategy, leverage market trends and technical indicators, and manage the psychological pitfalls of greed and fear.

Kaushik also provides insights on tax-efficient investing, integrating options trading into your portfolio, and optimizing your trades through swing trading and volume-weighted averages. From general mindset advice to specific trading techniques, this guide aims to steer you toward consistent profits.

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Practical Tips

• Set up immediate alerts for unusual account activity to catch financial setbacks early. By receiving instant notifications for any unexpected charges or withdrawals, you can address discrepancies right away, potentially avoiding a snowball effect of financial loss. For example, if your bank offers transaction alerts, enable them so that you're informed of any activity that could indicate a mistake or fraudulent action.
• Set up a "loss alert" system in your trading platform that notifies you when a trade is going south, prompting immediate evaluation. This could be a simple alert that, when triggered, requires you to take a moment to acknowledge the loss, assess the situation, and decide whether to cut your losses or adjust your strategy.
• Create a personal inventory system for items you frequently use, such as toiletries or non-perishable foods. When you notice you're down to your last one or two items, look for discounts or bulk deals to replenish your stock, similar to how a vendor might manage their inventory to avoid overstocking and financial loss.
• Develop a "What-If" game to play with friends or family during casual gatherings. Pose hypothetical scenarios related to common life decisions, like buying a car or planning a vacation, and discuss the potential risks and how to manage them. This social approach to risk management can lead to new insights and shared strategies.
• Create a decision-making journal to track and analyze your financial choices. Whenever you're considering a new investment or financial decision, write down the expected gains and potential losses. After making a decision, revisit the journal to record the actual outcomes. This practice will help you refine your ability to estimate profit-to-loss ratios over time and make more informed decisions in the future.
• You can set up automatic alerts for your investment thresholds to stay disciplined with your trading decisions. By using a stock trading app that allows you to set notifications for specific price points, you ensure that you're making trades based on predetermined criteria rather than impulse. For example, if a stock reaches a certain low point that you've identified as a good buying opportunity, you'll get an alert, prompting you to consider purchasing. Conversely, if a stock hits a high point where you've decided it's overvalued, you'll be notified to think about selling.

Selecting Appropriate Trading Instruments

This part of the book explores Kaushik's insights into specific trading instruments, highlighting the benefits of engaging in the trading of options and the practice of swing trading, particularly in the context of index stocks.

Opt for participating in transactions that span a longer duration instead of getting involved in the daily fluctuations of the market.

Kaushik advises engaging in trades that span several days rather than confining them to a single day, as this approach diminishes the likelihood of market manipulation and allows for a longer period to assess the stock's behavior. Swing trading is characterized by maintaining positions over a span that can last from a few days to roughly a month, offering increased flexibility and mitigating the impact of short-term fluctuations in the market.

Swing trading allows stocks a longer timeframe to exhibit their true performance, thereby diminishing the likelihood of price manipulation.

Swing trading offers a more flexible approach, not demanding the continuous monitoring that day trading entails. By acquiring stocks, you greatly reduce the chance of price manipulation designed to trigger your predetermined limit that would result in a financial loss through selling. Maintaining ownership of the stocks past the initial day may provide additional opportunities for the market trends to move to your advantage.

Practical Tips

• Create a personal checklist of criteria for stock selection that aligns with a swing trading strategy. This might include factors such as company fundamentals, historical performance, and market sector trends. By having a clear set of guidelines, you can make more informed decisions and reduce the likelihood of being swayed by short-term price manipulations.
• Create a simple spreadsheet to track the correlation between holding periods and returns for your stocks. By inputting the date of purchase, sale, and the return for each stock, you can analyze the data to identify trends that support longer holding periods. Over time, this could help you spot which types of stocks tend to do better when held for longer, guiding your future investment decisions.

Employ derivatives as a strategy for enhanced risk mitigation.

Kaushik recommends that seasoned investors integrate the use of options into their strategies to manage risk exposure. Options are essentially contracts that give the holder the right to buy or sell stocks at a predetermined price, with the risk limited to the amount paid to acquire the option.

Participating in options trading allows you to limit your possible financial losses to the sum expended on the premium.

When you buy options, the maximum you can lose is the amount you initially invested, but there's potential for significant gains. Many investors opt for options trading rather than futures trading because it offers a situation where the potential for loss is capped.

Other Perspectives

• Options can expire worthless, meaning the investor loses the entire premium, which is a risk that should be considered.
• The potential for significant gains in options trading often comes with high volatility and risk, meaning that while the gains can be large, they can also be infrequent or require a high level of risk tolerance.
• The liquidity in the futures market can be higher than in the options market, which can make it easier to enter and exit positions.

Focus your investment efforts on shares that are constituents of a market index.

Kaushik emphasizes the value of focusing on index stocks when engaging in day trading and strategies that span a brief duration. He particularly advises investing in shares that are part of the NIFTY 50 and SENSEX 30 indices due to their strong liquidity and stability.

Shares included in well-known indices such as the NIFTY 50 and SENSEX 30 generally offer greater stability and improved liquidity.

Selecting stocks that are components of a market index provides multiple advantages. The high volume of trades in these stocks guarantees that initiating or unwinding investments can be done smoothly, without significantly affecting the market value of the stocks. Additionally, the composition of these indices comprises shares that are meticulously chosen due to their market value, consistent profitability, and history of dividend payments, which indicates their general reliability and diminishes the likelihood of abrupt and unforeseen drops in value.

Other Perspectives

• While stocks in indices like NIFTY 50 and SENSEX 30 are generally more stable and liquid, they are not immune to market volatility and can still experience significant fluctuations, especially during economic downturns or market corrections.
• Stocks may be removed from an index if they no longer meet the criteria, which can lead to increased volatility and reduced liquidity for those stocks.
• The focus on market value can sometimes lead to a concentration of large-cap stocks, potentially overlooking mid-cap and small-cap stocks that might offer higher growth potential.
• The reliability of index stocks can be overestimated, as past performance is not always indicative of future results, and even well-established companies can face unexpected challenges.

Developing a robust mentality for investing.

This section explores Kaushik's insights into the psychological aspects of participating in stock market activities, highlighting the importance of emotional regulation, avoiding the natural 'fight-or-flight' reaction, and expanding one's repertoire of investment approaches.

Manage the impulses driven by avarice and trepidation.

Kaushik underscores that emotional factors like greed and fear can detrimentally affect the performance of a trader. He underscores the importance of engaging in trading with an objective, methodical approach, where decisions are guided by your planned strategy instead of emotions.

Ensure that your investment decisions remain unaffected by emotional biases, adhering to a balanced approach for consistent results.

Succumbing to greed may lead you to hold onto profitable investments for potential additional gains, but these can vanish should market conditions worsen. Concerns over previous setbacks can cause an individual to exit a potentially lucrative investment too soon. Therefore, controlling these emotions is paramount. Establish your financial goals and set predefined boundaries for tolerable losses, committing to these parameters regardless of your emotional state at any given moment. This methodical strategy enables you to implement your plan regularly, unaffected by emotional urges.

Practical Tips

• Create a personal investment exit checklist to avoid emotional decision-making by listing objective criteria for when to sell, such as specific profit targets, market conditions, or changes in the fundamentals of the investment. This helps you stick to a rational plan and resist the urge to exit prematurely due to fear of past failures.
• Create a "10-minute cooling-off" rule before finalizing any investment decision to manage impulsive reactions. By setting a timer for ten minutes after you've made an investment choice, you give yourself a buffer to reassess your decision with a clearer mind. This can help mitigate the influence of any immediate emotional responses that might cloud your judgment.
• You can visualize your financial goals by creating a vision board that includes images and symbols representing your desired outcomes. This makes your goals more tangible and can serve as a daily reminder of what you're working towards. For example, if you're saving for a house, include a picture of your dream home, or if you're aiming for early retirement, use an image that represents your ideal lifestyle.
• Create a decision-making flowchart for common scenarios you face, detailing the steps you'll take regardless of how you feel at the moment. For example, if you're trying to maintain a healthy diet, your flowchart could include a decision tree for when you're tempted by junk food, with predefined choices like opting for a piece of fruit or a healthy snack instead. This visual guide serves as a reference to keep your actions aligned with your goals, even when emotions run high.
• Create a visual reminder system by setting up a series of notes or symbols in your environment that prompt you to stick to your plan. For instance, place colored stickers on your credit cards to remind you to follow your budget instead of making impulsive purchases.

Resist the temptation to go against the prevailing market direction.

Kaushik advises investors to avoid the frequent mistake of opposing the prevailing market direction, which is often driven by one's ego and the urge to dominate. The story of Lalit Prajapat demonstrates that frequently altering one's investment approach in response to market fluctuations, rather than sticking to the initial strategy, can lead to significant monetary losses.

Attempting to outmaneuver the inherently unpredictable nature of the stock market can lead to significant financial losses for individuals.

Lalit's experience cautions investors about the risks of frequently altering their investment approach in response to short-term market variations. The erratic nature of the stock market frequently leads to early gains that are then overshadowed by larger monetary losses. Remember, no strategy is foolproof. Accept that you will sometimes face losing trades. The key to prospering in the stock market lies in sticking to a well-defined strategy, diligently enforcing your predetermined boundaries for minimizing losses and capturing gains, and avoiding the emotional upheaval associated with chasing after lost money or seeking unrealistic profits.

Context

• Changes in regulations or government policies can have immediate and unforeseen impacts on market conditions.
• Constantly buying and selling stocks can incur significant transaction costs, including brokerage fees and taxes, which can erode potential profits over time.
• Spreading investments across different asset classes can reduce the risk of significant losses from any single investment.
• While diversification can reduce risk, it cannot eliminate it entirely. Market-wide downturns can affect all sectors simultaneously.
• Being mentally prepared for losses can reduce stress and anxiety, allowing investors to make more rational decisions. This mindset helps in maintaining a balanced approach to investing.
• Regularly reviewing and evaluating the performance of a strategy helps investors understand what works and what doesn’t, allowing for necessary adjustments to improve outcomes.
• Setting boundaries is part of a broader financial plan, ensuring that investments align with an individual's risk tolerance, financial goals, and time horizon.
• Having a comprehensive financial plan can provide a framework that helps investors stay focused on their long-term goals, reducing the temptation to react emotionally to market changes.

Employ a variety of strategies when trading.

Kaushik encourages a diverse approach to trading styles. Instead, he encourages diversification across different approaches, recognizing that each brings its own unique advantages and nuances. He argues that limiting one's investment approach exclusively to brief transaction periods or maintaining assets for a prolonged time might cap potential profits and heighten the risk of unnecessary losses.

Allocate your funds across a range of investment strategies to achieve diversification.

Diversifying your investments among multiple trading approaches can result in a more balanced portfolio. For instance, you could allocate a portion of your funds to engage in swing trading, aiming for consistent gains within a brief timeframe, dedicate another segment to enterprises with robust foundational qualities for extended-term growth, and, should it match your proficiency and risk acceptance, think about incorporating derivatives trading into your portfolio to enhance your income. The growth of your financial portfolio can be sustained by employing a diverse range of strategies, even if a specific method may underperform temporarily.

Other Perspectives

• Concentrating on a smaller number of well-understood strategies might yield better results for some investors, particularly if they have a competitive advantage or deeper insight in those areas.
• The brief timeframe associated with swing trading may lead to a higher tax burden on short-term capital gains, which can reduce the net profit from such activities.
• The definition of "robust foundational qualities" can be subjective and may not always align with future market performance.
• The use of derivatives requires a deep understanding of the instruments and the market, and without this expertise, investors may be exposed to unforeseen risks.
• Some investment strategies may not be compatible with each other, leading to an inefficient portfolio that does not optimize returns.

Leveraging Market Trends and Stock Characteristics

This section of the text emphasizes Kaushik's practical approaches for identifying profitable trading opportunities, capitalizing on market trends, scrutinizing stock characteristics, and formulating a plan aimed at pinpointing the price that represents the average amount influenced by the volume of trades.

Prior to executing any transactions, it is crucial to thoroughly evaluate the current trend in the market.

Kaushik stresses the importance of understanding the overall market direction before entering trades. He demonstrates the ease of aligning oneself with the river's current. To improve your chances of success, make certain that your trading strategies align with the prevailing market trends.

Analyze the highest and lowest points of the benchmark indices to determine the market's general direction.

To minimize the impact of early market fluctuations, Kaushik recommends carefully monitoring the market's activity during the opening hour. Monitor the highest and lowest points reached by the SENSEX or NIFTY during this period. Entering into purchasing positions could be beneficial when the index sustains its position close to the peak following the initial hour, as this often signifies a rising trend in the market. When the index approaches its minimum value, it suggests a downward trend, which could signal a good moment to think about divesting. When starting out, it's advantageous to align your transactions with the prevailing market direction.

Other Perspectives

• Trend analysis often involves a degree of subjectivity, which can lead to different interpretations and potentially incorrect decisions about the market's direction.
• Some successful investors have built their strategies on value investing principles, which often involve going against the grain of current market trends.
• Benchmark indices only represent a subset of the market, often the largest or most traded stocks, and may not accurately reflect movements in smaller cap stocks or different sectors, which could be diverging from the main index.
• The opening hour is just one small window of the trading day, and focusing too much on it could lead to an overemphasis on short-term fluctuations rather than longer-term trends and fundamentals.
• The strategy assumes that early market behavior is a reliable indicator of the day's trend, which may not account for intraday reversals that can occur due to various unforeseen events or market news.
• A downward trend could be a buying opportunity for long-term investors who are looking to purchase stocks at a lower price, rather than a signal to divest.
• Overemphasis on market trends might lead to a herd mentality, potentially inflating asset bubbles or exacerbating market downturns.

Look for shares that are approaching their annual peak prices.

Kaushik emphasizes the significance of monitoring stocks that are approaching their annual high, particularly focusing on those that are trading at a price not more than 15% below their peak value over the past year. This strategy capitalizes on the momentum factor, where stocks demonstrating strength are more likely to continue their upward trajectory.

Keep a close watch on stocks approaching their annual highs, as they often continue to climb.

The realization that the stock market is propelled by emotional forces such as fear and greed leads to this conclusion. Investors often express enthusiasm for shares nearing their yearly highs, aiming to capitalize on the existing positive momentum which might drive the share price even higher. Conversely, stocks hitting their annual bottom often face a sell-off due to investor panic and the triggering of automated sell orders, which can exacerbate the downward trend. Kaushik believes that all relevant information is already factored into the stock prices, indicating that changes in a company's share value typically precede the general public's awareness of the company's internal affairs or potential outlook. Participating in trades when the market prices are at their highest within the year can take advantage of the current market sentiment, offering increased chances to achieve small profits.

Context

• Positive sentiment can drive demand for stocks nearing their highs, as investors anticipate further gains and are willing to pay a premium.
• Understanding the emotional drivers in the market can help investors develop strategies to mitigate risk, such as setting stop-loss orders or diversifying portfolios.
• Investors may use technical analysis to identify stocks nearing their yearly highs, looking at charts and patterns to predict future movements based on past performance.
• During a sell-off, the market may experience reduced liquidity, meaning there are fewer buyers willing to purchase the stock at its current price, which can exacerbate price drops.
• Despite the theory, there are documented market anomalies, such as the January effect or momentum investing, where stock prices deviate from what would be expected if all information were perfectly priced in.
• Traders often act on rumors or predictions about a company's future performance, which can lead to price changes before official announcements are made.
• This strategy involves buying stocks that have shown an upward price trend, based on the belief that they will continue to rise due to ongoing investor interest and market dynamics.

Implement a strategy that leverages the upward movement beyond the volume-weighted average cost.

Kaushik describes a strategy that takes advantage of the point at which the Volume Weighted Average Price is exceeded to identify the best moments to initiate trades, which is suitable for trading within a single day as well as over several sessions. This method focuses on examining the relationship between a stock's daily price fluctuations and its mean price, while also considering the number of shares exchanged.

Capitalize on the fluctuations in stock prices by initiating trades when they diverge from their average price, weighted by volume.

A strategy that involves monitoring a stock's volume-weighted average price (VWAP) suggests that if the stock's price drops below this average after having traded above it, this typically signals a likelihood of continued downward movement, suggesting that initiating a trade to capitalize on the expected decrease in the stock's price could be advantageous. When a stock's price climbs higher than its Volume Weighted Average Price (VWAP), it may indicate a rising trajectory, offering investors an opportunity to purchase shares in anticipation of offloading them at an elevated value. By implementing this approach, one can achieve favorable results in 60% to 80% of cases, and adherence to strict loss limitation measures coupled with the establishment of definitive goals for financial gains, which are typically aimed at securing returns that are twice as high as the potential losses, can lead to consistent income.

Practical Tips

• Practice paper trading when you identify a stock crossing below the VWAP to simulate real trades without financial risk. This will help you gain experience and see how the strategy would have played out. Use a spreadsheet to track your simulated trades, including the stock name, the price when it crossed the VWAP, and subsequent price movements.
• Develop a habit of reviewing company earnings reports and industry news during your morning routine to spot signs of potential stock price decreases. By integrating this into your daily activities, such as reading the news with your morning coffee, you can stay informed about market conditions that might affect stock prices. For instance, if a company you're watching reports lower than expected earnings, you might anticipate a decrease in its stock price.
• Create a feedback loop with friends or colleagues to gain insights into your approach's effectiveness. After implementing the strategy, ask them for honest feedback on what worked and what didn't. This can be as simple as sending a quick message after a meeting or conversation where you tried a new technique, asking for their thoughts.
• Create a monthly budget that includes a 'loss limitation' category for your personal finances. Allocate a specific amount you're willing to lose on higher-risk expenses or investments, and once you reach that limit, you stop spending in that category for the month. For instance, if you're experimenting with a new hobby that requires upfront costs, decide in advance how much you're willing to spend before seeing a return on your investment.
• Create a simple spreadsheet tool that automatically calculates the desired gain-to-loss ratio for any given investment. Input fields for potential loss and desired gain can help you quickly assess whether a prospective investment meets your criteria. If you input a potential loss of $1,000, the tool should indicate a minimum desired gain of $2,000 to maintain the strategy.
• Consider investing in peer-to-peer lending platforms to earn consistent returns. By lending money to individuals or small businesses online, you can receive monthly repayments with interest. Start with a small amount you're comfortable with and choose loans with a level of risk you can manage, spreading your investment across multiple loans to mitigate risk.

Optimizing Tax Considerations

In the book's final section, Kaushik offers valuable advice on managing tax obligations for traders, emphasizing the monetary advantages linked to the strategy of utilizing income tax harvesting, especially in the context of short-term trading.

Utilize strategies for optimizing taxes.

Kaushik outlines a methodical approach for minimizing the tax burden associated with gains from stock market transactions, a concept known as "Income Tax Harvesting." This strategy involves accepting some financial setbacks within your portfolio to balance out your gains, thereby reducing your overall taxable income.

Offset your profits by accounting for any losses to strategically reduce your total tax burden.

To maximize the advantages of managing your taxes on investments, you should take action as the fiscal year nears its end, typically aligning with the end of March in India. Identify the stocks in your portfolio that are currently not generating any returns. Understand the significance of disposing of shares and swiftly buying back a similar quantity. This process essentially maintains your stockholdings but allows you to register those losses officially. You can then apply these documented losses to reduce your overall taxable income from trading by deducting them from the profits made from other trades over the course of the full year.

Practical Tips

• You can analyze your spending to identify potential deductible expenses that you haven't claimed before. Look through your bank statements and receipts for the past year and categorize each expense. Research or consult with a tax professional to determine if any of these expenses could be tax-deductible. For example, if you work from home, you might be able to deduct a portion of your home office expenses, or if you've made donations to charity, those could also be deductible.
• Set reminders in mid-March to check for any pending tasks or compliance requirements that need to be completed before the fiscal year ends. This could include submitting tax documents, finalizing reports, or completing any financial transactions that could be beneficial to complete in the current fiscal year.
• Create a visual map of your stock portfolio to easily spot underperformers by using a color-coded system where each stock is represented by a dot on a grid. Green dots could represent stocks performing above your threshold, yellow for those at risk, and red for those not generating returns. This visual aid can help you quickly identify which stocks may need further analysis or potential selling.
• Create a spreadsheet to analyze the tax implications of selling and repurchasing shares in your investment portfolio. Input data such as the purchase price, current price, and number of shares for each stock you own. Add formulas to calculate potential losses and a column to estimate the tax savings if those losses were realized. Use this tool to help decide when it might be financially advantageous to sell and repurchase shares, considering your specific tax situation.

Leverage the fiscal benefits linked to the practice of swing trading.

Kaushik highlights the monetary advantages of engaging in swing trading compared to intraday trades. Earnings obtained through swing trading fall under the category of short-term capital gains and are taxed differently than the speculative income from day trading.

Swing trades may be subject to a more favorable tax rate on gains accrued over a brief period as opposed to the tax consequences for trades that are settled within the day they are made.

Employing tax reduction techniques can be beneficial in lowering your overall tax burden if you frequently engage in short-term trading activities. Profits generated through intraday trading often incur greater tax rates as they are classified as speculative income, in contrast to the system that allows the offsetting of short-term capital losses against gains within the same financial year, potentially lowering the tax burden.

Practical Tips

• Develop a habit of reviewing tax law changes annually to optimize your trading strategy. Since tax laws can change, set a reminder to review any updates or changes to tax rates and regulations at the end of each year. This will help you adjust your trading strategy to ensure you're still operating in the most tax-efficient manner possible.
• Explore tax-advantaged accounts for trading, such as an Individual Retirement Account (IRA), which can offer tax benefits. By using an IRA for a portion of your trading activities, you can defer taxes or potentially pay no taxes on the gains, depending on the type of IRA you choose. This can be particularly useful for traders who are looking to save for retirement while also engaging in the markets.