Can stock trading really supplement your regular income?
You trade to earn so you need to make profits by dabbling in stocks. However, that is easier said than done. Here is a primer how to go about it.
- Day trading appears to be the simplest way to make money by leveraging your margin. But day trading is often a zero-sum game. The occasional losses more than offset your regular small gains. It is too speculative and works on probabilities.
- Can you take the long term investor approach? You surely remember the story of how Rs10,000 invested in Wipro in 1980 would have grown to Rs600cr in 2019. But that is long term wealth by a long shot; definitely not regular income.
- You can arbitrage between stocks and futures. That is not too complex but there are two things to remember. You trade futures in lots and the minimum lot size varies from Rs5 lakhs to Rs7 lakhs. You need a solid corpus to start arbitrage and the returns are just about 7-9% annualized. That makes its utility limited for supplementary income.
- The best method to trade for supplementary income is to trade for the short term on cues. Cues could be company specific or sector specific or it could be macro in nature. The bottom-line is that there are more than 4,000 listed stocks and hence the primary approach to trading for income begins with the right selection of stocks.
- The big difference between trading on cues and speculating is that trading on cues is organized and disciplined. You first invest in knowledge and insights before investing in stocks. That is why trading on cues can work to your advantage.
- Short term trading cues stem from three broad triggers. Firstly, there are the quality high growth stocks that have overreacted on the downside and are ripe for a bounce. Secondly, focus on stocks that have news flows in their favour and where the momentum and sensitivity to news is high. Lastly, stay away from stocks that are the favourites of high frequency traders as it is hard to make trading profits on such stocks.
Four point strategy to trade for supplementary income
- The stock market is a slotting machine in the short run but a weighing machine in the long run. Hence, you need to understand how to chase mispricing and short term value to be a good trader. Here are four steps to go about it.
- Don’t try to apply trading strategy from a position of disadvantage. To begin with, have at least 5-6 months’ income set aside as liquid investments so that any temporary reverses do not set you back financially.
- Spend a good amount of time learning the nuances of the market. Learn the finer points of income statements, balance sheets, cash flows, intangibles and technical charts. That is your best defence against the vagaries of the market.
- Develop and test a sound trading methodology. Trading for supplementary income is as much about discipline as it is about skill. That is only possible with a fine tuned trading methodology which must be your guiding constitution.