Smart investors understand the risks and timing of the market to trade in Indian stocks. You can avail benefits of demat account when you trade successfully and make profit. To make profit you must know the underlying risks and methods to avoid or minimise them.
It is wise to weigh the potential risks of investing in Indian stocks against the benefits that may be gained before you decide to try your hand at share market trading.
Understanding Risks
There are two levels of risk when trading stocks depending upon whether you are the seller or a buyer of the stocks.
Seller
As the Seller of the stocks, your main risk is losing the entire premium that you paid during buying time if the stocks are at lower threshold. If the stock expires worthless then you are out your entire principal.
Buyer
As the buyer of the stocks, you are exposed to a significantly higher level of risk. If you are buying uncovered calls, for example, then your potential loss is unlimited as the underlying security could potentially rise very high.
Valuation of Stocks
Purchasing a stock gives a certain amount of intrinsic value, but there are some underlying conditions to make profit. Penny stocks and high volatile stocks value decreases with the time, and is constantly declining when the market goes down.
Prolong Loss Period
The stocks especially options suffer valuation with time decay. When the market takes hit, stock options are among most affected types. For example, the closer an option contract gets to its expiration date the more it loses value. Once the option reaches its expiration date it will have no value unless it is exercised in-the-money. If the underlying security takes an unexpected turn during the timeframe of the contract, the investor will potentially lose all of the investment capital. Unlike with stocks having waiting and selling period, you cannot simply wait it out. For this reason, options are also known as wasting assets. Smart investors of Indian stock market are aware of merits and demerits of options, futures and commodities.
Taxes
Realised capital losses from stocks can be used to reduce your tax bill. But there are certain types of investments in stock market that has tax implications even if you incur losses.
Stock options are short-term investments, so they are taxed at a different rate than longer term investments. However, losses on stock options can also be used to offset gains in other investments, so they can work to your advantage in this regard as well. It is best to consult with a tax advisor to figure out your best strategy for tax savings. Tax saving schemes in stock market mostly bear less profit compared to high tax stock gains.
The bottom line is that stock trading can be used to leverage your positions and make significant profits – opening demat account with zero brokerage can help you in exposing smaller investments to control risks in stocks market.
Whether business or stock market, every wealth lever comes with their own set of risks and require the investor to be constantly on top of what is going on in the market. Due to their unique time constraints, deep knowledge, timing and continuous tracking, stocks trading are not for investors who like to set and then forget their investments like they do with fixed deposits when they invest money using fd interest rates calculator in banks.
