Friday, June 17, 2011

Rules of Intra-Trading

Follow these basic tenets to avoid losing your shirt in this high-risk arena

 Invest what you can afford to lose
Intra-day trading carries more risk than investing in stocks. Invest only the amount that you can afford to lose. An unexpected movement can wipe out your entire investment in a few minutes. In January 2009, the Satyam Computer script fell more than 80% from Rs.188 to Rs.31 in one day. If it is a leveraged position, you could lose more than you invested

Choose highly liquid shares
Day traders must square their positions at the end of the trading session. This is easy if you are trading in large-cap, index-based stocks, which are very liquid and get traded in large volumes every day. Don't dabble in mid-cap and small-cap shares, where the traded volumes are not very large. You could end up holding shares that have no buyers at the end of the day.

Trade only 2-3 scripts at a time
It's prudent to diversity your portfolio when you are investing in stocks, but when it comes to day trading, confine yourself to just 1-2 stocks. You can have up to 8-10 large-cap, index-based stocks on your watch list, but don't trade in more than 2-3 stocks at a time. Stock movements need to be tracked closely by the day trader and you won't be able to monitor more than 2-3 stocks at a time.

Research watch list thoroughly
Read up on the 8-10 stocks on your day trading watch list. You should know about all forthcoming corporate actions (stock splits, bonuses, dividends, result dates, mergers, etc) as well as technical levels of the stock. There are websites, such as or where you can feed in the price (high, low and closing) to know the resistance and support levels.

Fix entry price and target levels
Before you buy, fix your entry price and target level. The psychology of the buyer changes after he has bought a stock, which could interfere with his judgement and nudge him into selling too quickly even if the price moves up marginally. This might cost him the opportunity to fully gain from the upside. If you set yourself a price target and adhere to it, your psychological frame will not change.

Use stop losses to contain impact
A stop loss is a trigger for selling shares if the price moves beyond a specified limit. It helps the buyer limit his losses in case the share belies his expectations and moves down(or up). Suppose you buy 20 shares of Reliance at Rs.940 each and set a stop loss of Rs.920. If the share falls to Rs.920, your shares will be sold. In this manner, your losses will be curtailed even if the share drops to Rs.900. A stop loss takes the emotions out of the decision to sell.

Don't be an investor
Day trading and investing are like chalk and cheese. Both involve buying shares but factors considered are completely different. One takes into account technical data, while the other looks at its fundamentals. Don't try mixing the two. Often, if an intra-day bet goes wrong, the buyer does not book his loss, but takes delivery of the shares and then waits for the price to recover. This can be a costly mistake because the shares were bought with an ultra short-term horizon. They may not be worth investing in.

Book profits when targets are met
Greed and fear are the two biggest hurdles for the day trader. Just as he should not flinch from booking losses when the trade goes wrong, he should book his profits when the shares reach his target. If he feels that there is more upside to the stock, he should reset the stop loss. Suppose you invest at Rs.100 for a target of Rs.110 and set a stop loss of Rs.95. If the price goes up to Rs.110 but you are bullish, raise the stop loss to Rs.108. This will reserve some of the profit.

Don't fight with the market trend
Even the most sophisticated analysis cannot predict which way the market will move. All technical factors may be bullish but the market may decline. Technical factors only point to the likely movement of the market, they don't guarantee it. If the market movement is not as per your expectations, don't try and be a contrarian. You may end up losing more.

Small is beautiful
While stock investments can yield stupendous return, be content with small gains from intra-day trading. Day traders get a leverage of almost 3-4 times their investment, so even if your stocks go up by 3%, you would have earned 9-12% on your investment. In any case, it's rare for large-cap stocks to move by more that 5-6% in a day. Even if you get a return of 10-12% on your capital, it's not bad for a day's work.

Saturday, June 4, 2011

Being a Guarantor

Should you be a guarantor ?
Take on the financial commitment only if you have the ability to repay a loan if the borrower defaults.

Guaranteeing a loan is vastly different from signing a document as a witness. When you agree to become a guarantor for a loan, you are making a financial commitment, one that should be done only after considering all the aspects. This is important because if the borrower defaults on the payment, the responsibility of the loan has to be borne by the guarantor. In such a case, there is little a guarantor can do except talk to the lender and try to make a settlement for future payments of the remaining debt

When a person signs on as a guarantor, he becomes as liable to repay the loan as the principal borrower. According to the law, if the borrower defaults and is untraceable, the guarantor has to pay the outstanding debt. If need be, his assets can be sold to clear the debt.

Banks insist on guarantors for the loans in which there is no appropriate collateral, such as education and business loans.For other loans too, banks can insist on one, especially if the borrower does not have a good credit history. Other instances where a guarantor is needed are if the borrower has a transferable job or one which involves frequent travel abroad. It's also necessary when the loan is applied for in a city other than the one that is the applicant's permanent address.

While a guarantor need not service a loan on a monthly basis, the loan repayment can have an impact on his credit history. In case of a default, not only will he be asked by the financial institution to pay, but a default on his part while repayment the loan will also be reported to the credit bureaus.

Even if the EMIs are being paid regularly and on time, the relationship of the guarantor and the borrower could affect his own borrowing capacity. For instance, if a friend is a guarantor, he will be able to take a loan independently. However, if the guarantor has a closer relationship, such as a wife, she will have to shoulder a quasi liability. The means that if she wants to take a loan, her borrowing capacity will be calculated after accounting for the original loan that is being repaid.

Also, the liability of the guarantor usually terminates only after the loan has been fully repaid. If you are signing up for a home loan guarantor, be prepared that it will impact all your other financial borrowings for the next 10-20 years. So if you do want to help someone in need, it would be better to opt for short-term loans, such as car and education loans. 

In case you want to be relieved of your responsibility as a guarantor, review the guarantee deed and conditions of revocation. Usually, you can revoke it by giving a notice in writing to the lenders as well as  the borrower. The lender will then check the borrower's financial condition and the original arrangement. However, relieving a guarantor is solely on the lender's discretion. The bank's rationale is that the guarantor cannot shirk his responsibility mid-way as he had initially offered the guarantee for the full tenure of the loan.

However, revocation can be considered in certain cases. You can opt for it if an additional loan has been granted to the borrower without your consent, such as a top-up loan. You will, however, only be relived of the second loan and will be liable until the original amount of the loan has been repaid. The other options include you providing a substitute guarantor with the consent of borrower, or prepayment of the loan by the borrower.