In this post, read the mistakes to avoid day trading or Intraday equity, options and futures trading. Also read other intraday mistakes traders do.

Any novice equity investor or trader does these mistakes when they start investing or trading the stock markets. Even I have done these mistakes. Hell I lost 7 lakhs. Though 7 lakhs looks a small amount, percentage wise, it was 99% of my savings. I had to take a Rs. 1 lakh loan to survive at a time when we were expecting our first child and looking for a bright future. Life was hell at that time. Thank God things have improved now.

You can read about the mistakes I did in stock trading here.

Day Dreaming To Instant Riches

Just because brokers give a lot of margin on Intraday day trading does not mean you should take benefit for it.

Since I get a lot of calls from novice Intraday traders I know what most of them are doing. They want to start with Rs.10,000/- and want to make Rs.50,000 a month. That’s a return of 500% a month. No doubt why they get trapped seeing ads of tip providers who tell them to make Rs.10,000 everyday by investing just Rs.5000. Avoid these traps to save your money.

Please understand these kind of returns are impossible to get over long term. May be ten or twenty days in a year you may make 200% to 300% return in a single day, but over a year which has 250-252 trading days, you will be in huge loss, if this is what you are trying.

Do not try to attempt to make 100% return in a day or a month. You will fail.

Stock trading is a business. There is risk involved and stock trading is NOT Get Quick Rich business. Even traders like Rakesh Jhunjhunwala, who is worth more than Rs.220 crore, did not try to make 100% a year. These great traders know there is no point in running after something which is impossible to get.

They make money slowly but compound it over long time to create huge wealth. Great traders and investors are very patient and know it will take years to create a lot of money.

Lesson:

Stop day dreaming to create huge wealth in one day, month or even a year

Making Wrong Sense Of The Margin Requirements

Margin given on Intraday trading under MIS (Margin Intraday Square-off), is more than margin given for overnight positional trading under CNC (Cash N Carry). This is the reason traders try to take too much leverage on intraday day margin given.

This is pure greed psychology. Mindset of a Intraday day trader is – we will make more on very less money and very fast in a single day itself.

In real world, there is no business in the world that will generate too much money with too little money. If this was possible Mukesh Ambani would be an Intraday trader. Why work so hard to make money? For such a rich person like him, he can invest one hundred crore everyday, and make two hundred crore everyday. Do you really think its possible?

If this was possible, in this world there would be no Doctors or Engineers if Intraday day trading would have resulted 100% return everyday.

The Real Reason Why More Margin Is Given In Intraday Day Trading

First let us see if it is true that more margin is given in MIS (Margin Intraday Square off) trading.

See this image:

MIS Intraday Equity Margin India

This image was generated real time at 10.30 am, on 28-04-2017.

As you can see for positional trading CNC, there is only 1 time margin, but for MIS (Margin Intraday Square off) trading, 14 times margin is given.

CNC Margin Calculations:

Assuming Reliance Ltd. is at 1400, cash available with trader is Rs.10,000/-.

So total he/she can buy: 10,000/1400 = 7 Shares.

MIS Margin Calculations:

For MIS intraday margin the trader is allowed 14 times margin.

So total he/she can buy/sell: (10,000*14)/1400 = 100 Shares.

Do not know why the calculator is showing 102, but that is not important. What is important is that for Intraday trading 14 times margin is given.

Here is the reason why more margin is given in intraday day trading by brokers:

The trade will be automatically closed by the system at around 3.15 – 3.20 pm, even is the trader forgets to close the trade.

Historically it is seen that in one trading session a stock rarely moves more than 5%.

Let say at 9.30 am the trader bought 100 shares of Reliance Industries Ltd. for intraday trading.

Price of the stock: 1400. Margin blocked: Rs.10,000.00

At 3.00 pm the stock fell 5% and is at 1330.

The trade is closed in panic by the trader.

Total loss:

Buy price: 1400 * 100 = 1,40,000.00

Sell price: 1330 * 100 = 1,33,000.00

Total Loss: 1,33,000.00 – 1,40,000.00 = Rs. -7000.00

Money blocked was 10,000.

After the loss money remaining in the account:

10,000- 7,000 = 3000.

As you can see even in a huge downfall of 5% intraday, the money lost was well within the margin required for trading.

Please note that for more volatile stocks less leverage is given.

As I can see, for Bajaj Financial Service Ltd., only 3 times margin is given for intraday trading.

Brokers see historical movement data intraday for any stock, then decide the margin to be given for intraday trading.

Less volatile stock, more margin. More volatile stock less margin.

Please note that for CNC (Cash n Carry) positions, all stocks get 1 time margin only, because for CNC positions the stock has to be delivered to the buyer. For CNC (Cash n Carry) positions, shorting a stock is not allowed. Here are the reasons why.

For option buy positions, full margin is blocked. It does not matter if it was closed intraday or the trade was taken overnight to next day or until expiry.

For option selling, and future trades buy or sell, the brokers may block different margins for intraday and overnight positions. It is obvious that for intraday less margin is blocked, and for overnight positions more is blocked.

So the real reason why for intraday day trading (MIS) less money is blocked is not because that the traders can make more money, but because that there is less risk for the brokers.

Unfortunately most intraday traders fall for greed and try to make too much money from too little money, forgetting that if they can make 14 times the money, they can also lose 14 times the money.

If profits are calculated on the final price of buy or sell, then the loss is also calculated on the final price of buy or sell

Keep this in mind before taking any intraday trade.

That is the reason I have stopped trading intraday trading, and have become a complete conservative option trader. Right now while writing this at 11.09 am on 28-Apr-2017, I know the hedge trade is protecting my capital, so I am not much bothered about my traders. At 2 pm I will see. Do not forget that it is all positional trading, there is no need to keep watching the markets every second like intraday traders.

Learn how to calculate Annualized Volatility and know if it is worth to know about it.

A lot of traders who have done my options trading course, want to know how to calculate Annualized Volatility.

Volatility is very important factor in option trading. This is the reason many traders want to calculate Annualized Volatility, basically to try to figure out future prediction of Volatility.

Please understand that Volatility is different than Volatility Index. Volatility is the percentage of movement of a stock or Index, Volatility Index is the stock market’s expectation of 30-day volatility. Volatility Index is a complex formulae and is constructed using the implied volatilities of a wide range of options available to be traded in that Index. For example Nifty Volatility Index is based on INDIA VIX which can be found here:

https://www.nseindia.com/live_market/dynaContent/live_watch/vix_home_page.htm

Annualized Volatility is partly Technical Analysis. Basically before traders want to take a trade they would like to know if the stock will move and in what direction. If right they make money, if wrong they exit with a stop loss.

Historically Stocks are more volatile than Stock Index. The reason is stocks are individual entity but Index is a group of stocks. However Annualized Volatility can be calculated on both Stocks and Index.

What Is Volatility?

Volatility is the measure of variation of a stocks movement over time. Over time is not specific but general depending on what is the traders view and what trade he is taking.

Some stocks are too volatile intraday, but some stocks are not so volatile. For example stocks like HDFC Bank Ltd, are not so volatile intraday, but stocks of smaller companies are very volatile intraday, like GMR Infrastructure Ltd.

HDFC Bank move on 24-April-2017 at 9.40 am – markets are open for trading:

GMR Infrastructure move on the same day, 24- April -2017 at 9.40 am – markets are open for trading:

Similarly it is has been observed that some stocks are too volatile over one year time, but some stocks are not so volatile over one year time. For example stocks like HDFC Bank Ltd, are not so volatile over one year, but stocks of smaller companies are very volatile over one year, like GMR Infrastructure Ltd.

HDFC Bank, one year move from May 2016 to April 2017 at 9.41 am – markets are open for trading:

GMR Infrastructure, one year move from May 2016 to April 2017 at 9.40 am – markets are open for trading:

This data is very important to know Annualized Volatility and take a trade based on it.

How To Calculate Stock Volatility

For this we will need historical closing prices of the stock or Index.

Here you will get historical closing price of NIFTY 50:
https://www.nseindia.com/products/content/equities/indices/historical_index_data.htm

You can select the time period and get the closing.

Here is the Historical Data for NIFTY 50 from 01-04-2017 to 24-04-2017:

Historical Data for NIFTY 50 from 01-04-2017 to 24-04-2017

You will get these data there:

Date, Opened at, Highest Price for the Day, Lowest Price for the Day, Closed at (this will be required for calculating Annualized Volatility), Total number of Shares Traded, and Turnover in Rs. Crores.

To calculate Annualized Volatility we need the closing price for the day only.

Here is closing price of Nifty from 01-Apr-2017 to 24- Apr-2017. Note that the percentage change in closing price is calculated like this:

Daily % Change = (Current Closing Price – Yesterday’s Closing Price) = XX.XX
XX.XX / 100 = Daily % Change

In other words, subtract yesterday’s closing price from today’s closing price and then divide the result by 100.

Anyone good in making Excel sheets will be able to make them at home. In an Excel sheets the calculations will be automatically done once the formulae to calculate the percentage change is copy pasted in all columns.

Please note that to calculate Annualized Volatility I have taken out the closing price of 03-Apr-2017 because we need the previous day closing price. We have not taken out that price as somewhere it has to start and end.

[table id=2 /]

We have got the most important information. With this information we will find out the Volatility of Nifty from 01-04-2017 to 24-04-2017. Please note that to find out the Annualized Volatility you will have to take out one year closing prices. However since here I am just trying to explain how to find out Volatility, I am taking out only few days of closing prices.

To take out Volatility over a time we need to find standard deviation formula. You can use Excel to make this process easy. In simple math, Standard deviation is the degree to which the prices vary from their average over the given period of time.

See the image below, in Excel, the formula for standard deviation is =STDEV(from col no:to col no). The col no is the column which is used to keep the percentage change from the previous day.

See the image below:

Standard Deviation Nifty April 2017

As you can see I have used the formula for standard deviation, =STDEV() and got the standard deviation as 0.49%.

This is daily standard deviation of Nifty from 01-Apr-2017 to 24-Apr-2017. Like this one can take out standard deviation of one year.

Calculating Annualized Volatility

We have got the standard deviation. To get the Annualized Volatility we need to multiply daily standard deviation by the square root of 252.

Why 252?

Because in one year almost 252 are trading days. Rest are weekends or holidays when the markets are closed.

This can be done in Excel. The formula for square root in Excel is =SQRT().

Square root of 252 is 15.87.

15.87 * 0.49 = 7.77%.

Based on the price movements from 01-Apr-2017 to 24-Apr-2017, Nifty Annualized Volatility is 7.77%.

Note: For very correct Annualized Volatility it is recommended take at least last 60 days closing. The Annualized Volatility is no guarantee that in one year the stock or Index will move only that much in a year, but it gives a rough idea that most of the time that will be the most movement. In our case 7.77% is Annualized Volatility of Nifty based on the period of Volatility from 01-Apr-2017 to 24-Apr-2017.

Can We Tweak This Data?

Yes Volatility can be found out for any time period. You can calculate Monthly Volatility or Weekly Volatility.

Traders looking to trade Bank Nifty Weekly Options can find out Bank Nifty Weekly Volatility.

For Monthly Volatility, get one months volatility, and multiply the daily volatility standard deviation by the square root of 21.

For Weekly Volatility, calculate the weekly percentage change for at least 5 weeks, and take the standard deviation of that data. To Annualize the weekly volatility, you will need to multiply by the square root of 52. One year has 52 weeks therefore multiply by the square root of 52.

Annualized Volatility Calculation Is It Worth It?

It is a mixed answer. Like I said Annualized Volatility is no gurantee that the stock will move only that much, however it gives a rough idea about the stocks movement. Some traders do take a trade based on Annualized Volatility. However there is no historical data if trades based on Annualized Volatility make more than 50% times profit.

Today we will learn about Stock Auctions done if trader did shorting of stocks without holding them.

Before reading this article I request you to read why an auction is done which is written in this article: Shorting Stocks Can Be Dangerous If You Do Not Have In Your Demat Trading Account.

In short auction of stocks is done if a trader shorted or sold stocks and left it overnight without closing the trade Intraday, and he/she does not have the stocks to sell in his/her demat trading account.

In that case the market makers are obliged to deliver the shares to the trader who paid money to buy the shares. To get the shares from market Auction is done.

What Is An Auction Market

An auction market is a place where members of stock exchange can participate.

Membership of the Exchange/ NSCCL is open to corporate entities, limited liability partnerships, partnership firms and individuals who fulfil the eligibility criteria laid down by SEBI and NSE.
Source NSE Website: https://www.nseindia.com/membership/content/cat_of_mem.htm

Here is the eligibility criteria to get Membership of the Exchange:
https://www.nseindia.com/membership/content/eligibility_ctra.htm

Auction market is a special market place conducted between 2 and 2.45 pm on all trading days if required. Why I am saying if required is that a lot of brokers now-a-days do not allow these kind of short positions overnight. These kinds of trades are either rejected straight away or allowed only in the MARGIN INTRADAY SQUARE-OFF (MIS) mode, that makes sure the trade is closed automatically by system between 3.15 to 3.20 pm even if the trader does not closes or forgets to close the trade.

Therefore there may be days when the auction is not required as no trader was able to sell stocks and hold overnight without holding them.

But there can be instances when a trader does MIS trade and short sells a stock that goes up and hits short circuit. When short circuit is hit, trading gets halted for the rest of the day for that stock.

If trading gets halted there is no way the trader can buy back and close the trade the same day. Even system cannot do that as trading is halted and when the system triggers to buy back the stocks the same day, they will be rejected by the exchanges.

Note that system does not know trading is halted or not, it will do its job but the exchange will reject the trade.

These kinds of shares go for auction if trade was complete.

The Process of Auction Market

As we have discussed members of stock exchange meet at a place between 2 and 2.45 pm do sell shares of stocks that were not closed the day before by the seller who did not have shares in his account to deliver to be sold on T+2 day (Trading Day + 2 Days).

T+2 because in India whenever a buy or sell of shares is done it is done on the second day after the trading day.

For example suppose Trader A bought shares of XYZ company on 17-April-2017 (Monday) and paid in full.

17-April-2017 (Monday), becomes the First Trading Day or T Day.

18-April-2017 (Tuesday), becomes the Second Trading Day or T+1 Day. Shares will still not come in his demat trading account.

19-April-2017 (Wednesday), becomes the Third Trading Day or T+2 Day. Shares will come in his demat trading account this day.

This in short in India is called T+2 Day or T2 Day.

Same is the case with selling shares.

Now coming to the process of Auctions.

At 2 pm the next day when shares were sold but cannot be delivered will be Auctioned. No other shares will be auctioned, as for them it is not required.

Exchange will tell the name of the shares, total number of shares required to be delivered that were short in the trading account but not present and fix a price band.

This price band is very important. Suppose share of company XYZ that needs to be auctioned closed on the previous day at Rs. 100. Exchange will fix the price band of auction at 20% up and 20% down.

So a seller who has the shares can offer to sell the shares at 20% up at Rs. 120.
Or they can sell the share at 20% down at Rs. 80.

It is obvious the sellers will demand the upper price band only. Why would they lose an opportunity to make money?

Exchange has no other option but to buy these shares from the seller at 120 and deliver the next day to the person who bought the shares from the trader who sold but cannot deliver.

It does not end here. Who did the mistake here? The buyer or the seller? It is obvious the seller had no right to sell the shares without having the shares. It was fine if he closed the same day, but had no right to carry forward a promise of delivery of shares without owing the shares.

This is the reason why stock exchanges will levy a penalty of 0.05% on the value of stock per day. This is known as “Auction Penalty”.

Calculating The Auction Penalty

Trader A shorts 100 shares of company XYZ at 95. The shares closes at 100. Trader A does not buy back the shares and unfortunately does not have shares in his demat to deliver the shares on T+2 Day.

Share Auction for XYZ company for only 100 shares is held.

Exchange buys the shares at Rs. 120 – the upper price band limit.

Trader A had sold the shares at 95. So he gets Rs. 95*100 = Rs. 9,500/- credit in his demat account.

But he did not deliver the shares, so has to pay a Auction Penalty.

Exchange bought the shares at Rs. 120. Cost to buy the shares:
120*100 = Rs. 12,000/-

Difference between sell and buy:
9,500-12,000 = -2500
Plus .05% Auction Penalty.

So Trader A who sold the shares but did not buy back and did not deliver will get Rs. 9500/- but will have to pay Rs. 12,000 + 05% Auction Penalty.

Therefore net loss Rs. 2500 + Auction Penalty of .05%.

This is the reason please be careful when you sell/short stocks if you do not have them in your demat account.

One way is to learn hedging to reduce the loss.

See this trader did the strategy in 2 trading accounts and both resulted in profits:

Or if you are not a derivative option or future trader, then invest in the right stocks for the long term.

Read to know why shorting stocks can be very dangerous if you do not own the stocks in your Demat Trading Account.

I have done it myself. I mean shorting stocks without having them in my Demat account, leaving them overnight and have faced problems.

Well things have changed for the better but not sure how many brokers do not allow that to happen.

In short here is the dangerous trade:

1. A trader shorts shares of XYZ company thinking that it will go down. He does not own them in his trading demat account – just shorts them as a trade.

2. This trade is not done as MARGIN INTRADAY SQUARE-OFF (MIS), but as a normal trade which can be left unclosed overnight.

NOTE: This is a very important information. When I did this mistake in 2007-08, a lot of brokers allowed shares to be sold without in their clients demat account and NOT on a MARGIN INTRADAY SQUARE-OFF (MIS), but CASH N CARRY (CNC) or NRML a delivery based product or a product that a trader can carry forward overnight.

Today in the year 2017, things have changed. A lot of brokers do not allow shorting of stocks if not there in their clients demat account, in CNC or NRML mode, but this is allowed only in the MARGIN INTRADAY SQUARE-OFF (MIS) mode. This means even if the trader forgets to close the position, the MIS system will close the position by 3.15 to 3.20 pm to make sure this position is not carried forward the next day.

This is a good move to save traders from high risk trades.

MARGIN INTRADAY SQUARE-OFF (MIS) is NOT a delivery based trading. It is normal cash to cash trading in a single session, so no stocks are involved. For example Mr. A sells stock of XYZ company at 50 spot price at 10 am, and buys it back at 48.60 at 2 pm – there is no delivery required to be given by Mr. A for the stock as the trade was finished the same day. In fact if Mr. A sells that stock even if he has the stocks in his demat account and buys it back the same day, the stocks will not go out from his account as delivery is not required.

3. The trader does not buy it back as the stock went up and the broker too does not close the stock then there is a problem.

What Is The Problem?

The problem is that Mr. A had shorted the stock without owing them and it has to be delivered to the trader who bought it from Mr. A. But the problem is Mr. A does not have the stocks in his demat account.

Here is the problem. From where the market exchange will bring the shares to be delivered to the trader who bought them?

Answer is Auction the next day.

Read to know why taking tips and doing speculative trading can lead to huge losses in trading. It is better to stop taking advisory service and research.

I have written a lot of times why you should stop doing speculative trading and also never take tips to do trading.

When I say this I do this myself and have clearly written in all pages in my site that I do not give tips and will never ever give tips.

In fact people are willing to pay me for tips every month, but I refuse. If I am against something I will never follow it myself just to make money.

Sorry but this site was opened with teaching in mind and I take a very small fees to make you a better trader and give you well researched strategies that work over a long period. I have to take a fees as it has taken a lot of money and time to research the strategies, and to give you my time. I hope you understand the site takes 5-8 hours a day, and like you my time is not free.

A lot of people ask me this question – when you are trading yourself why you are not giving these strategies for free. The above is my answer. It takes a lot of my time and like you my time is not free. The same question goes to people who think why there is a charge? Why don’t you do your job for free? After all it only takes your time.

I agree if the site never took anytime then I would make my course free. But if you give something for free people would not give any value to it. Imagine getting a car for free as a gift and on the first ride it gets a big scratch. How would you feel? Well not so bad as it was a free car anyway. But now imagine you bought a new car for a few lakhs and it gets a big scratch. How would you feel? Very bad. You will straight away take it to the nearest service centre and get it repaired.

This is the difference between free and paid.

That’s the reason I have to keep a fess.

Coming to how taking advisory/tips service can damage your financials:

Here is another victim of tip/advisory service:

This is his email:

Manas Rs.2,73,767.00 Trading Loss Email

Dear Dilip Sir,

I have already discussed with you about my trading. But today I analyzed it in detail and found I have lost Rs.264767+10000 advisory company. Total amount of Rs.2,73,767.

I have shared my bitter experience with some of my well wishers and they advised me not to do any trade in future. They told if I do not listen them I will be drowned deeper and deeper.

Still I have a great hope on you. Because who is in a drowning situation, a straw is also helpful to him.
I am very systematic. I have recorded all my transaction since the inception of my trading. Due to which I could analyze the losses on details. I swear the attachment is pure.

Why I wrote you, because I have stopped trading since 31.03.2017.

What should I do, still I am in a confusing state of mind?

Even though I am highly impressed with your emails, still I am afraid of.

The loss amount is very high for me and now I do not want any profit from trading, but only can expect to recover my lost money.
I know very clearly that you do not give tips, still I expect from you one thing. That is doing your course is not a matter of fact to me. But after that with my existing capital (holding shares) can I trade. can I expect I can recover the loss (though not quickly but slowly).I also ask you one thing frankly, after getting your course can I recover instead of loss?

My questions may be irritating for you, by sir it is very practical to me (as I have lost more after getting tips).
Sir, honestly I need your help in this regard.

If needed I can provide my bank statement, which I have paid to the broker.

Sir, please guide.
Yours faithfully,
Name Withheld for Privacy

Here was my reply:

Hi Name Withheld for Privacy,

What you did was either tips or speculations – both wrong that’s why you lost.

Reason your loss, do not get dismayed by it.

My course is doing good because it has solid reasoning of hedging behind it.

You lost because you were doing naked trading – This is where the problem is.

Hedging is winner takes less, but losers give very small.

Take your call now.

Best Regards,
Dilip Shaw

Conclusion:

• Stop taking tips or advisory service. You may suffer huge losses.
• You cannot become rich by taking tips.
• Research well yourself to become a better trader.

Please read strategies and preparation for stock market crash to understand this post better.

One of The Best Ways to be Well Prepared For Stock Market Crash Is To Diversify

I offer a course in which all instruments of investments opportunities in India are written. It covers all like stocks, mutual funds, even government securities investments and allocations of where to invest what. You can read about the invest well course here.

This will help you a lot to decide how not to keep all eggs in one basket and the best places to invest your hard earned money. With the help of the course you will be able to chose the best stocks, mutual funds and other opportunities to invest. If your money is well diversified, one stock market crash will not make you poor.

Another Way To Be Prepare For Stock Market Crash Is To Invest Geographically

Geographically also you can invest in many countries, but it is way too complicated to decide in which country to invest and where to invest etc. There are mutual funds in India that invest in many countries, but I have found that Indian mutual funds investing in India over a long period of time perform better than foreign country investing mutual funds, so its better you stick to mutual funds investing in Indian companies. How to chose the best mutual funds is written in the invest well to retire with crores course.

Keeping some cash handy is also a good idea

As soon as markets crash, just get in when everyone is selling. There will be huge liquidity for buyers.

During a crash, whatever the buyers bid for, the sellers accept and reduce their ask price.

When the markets are going up, “ask” is stronger than the “bid” prices.
When the markets are going down, “bid” is stronger than the “ask” prices.

Stock Market Crash Is A Great Opportunity To Save Taxes

Exit from not so good stocks from you portfolio and take a short term loss that can be carried forward for 8 years and enter a better looking stock. You then save your taxes and also get a better return over the long term.

Carry Forward of Short Term and Long Term Losses

You may not be able to take benefit of your entire short term or long term loss in the same year. In that case you may show your short and long term loss in capital loss section and carry it forward for next 8 assessment years immediately following the assessment year in which the loss was first computed.

During a Bad Stock Market Crash Patience is Important

Total crash time of the 2008-09 crash was almost 17 months. But see after than the recovery was less than 12 months. Within 12 months stock markets were back to what they were in January 2008.

Read the example of HDFC Bank return given in hedge is the best way to avoid huge losses in a stock market crash.

You will know why buying during a crash is very important. But it is very important to chose a good stock to buy. You do this course to know how to chose a good stock to buy.

Learn what to do before and after stock market crash and how to take benefit of market crashes.

Stock Market Crash is of Two Types:

1. Sudden Bad News Overnight Market Crash
2. Good or Bad News and Long Time Market Crash or Up Move

I hope the way I have named it, the meaning is quite clear and obvious. The first one is any Terror Attack e.g. 9/11 attacks, Natural Calamity e.g. Tsunami or Major Earth Quake, Financial Corruption in a Big Company, e.g. Lehman Brothers Company Bankruptcy crashed stock markets all over the world for more than one year, and brought one of the biggest financial crisis & recession period in the whole world for 1 and half years.

Here is the link for more details on Lehman Brothers Company Bankruptcy: https://en.wikipedia.org/wiki/Bankruptcy_of_Lehman_Brothers

On September 15, 2008, Lehman Brothers filed for bankruptcy. With $639 billion in assets and $619 billion in debt, Lehman’s bankruptcy filing was the largest in history, as its assets far surpassed those of previous bankrupt giants such as WorldCom and Enron. Lehman was the fourth-largest U.S. investment bank at the time of its collapse, with 25,000 employees worldwide.

Lehman’s demise also made it the largest victim of the U.S. subprime mortgage-induced financial crisis that swept through global financial markets in 2008. Lehman’s collapse was a seminal event that greatly intensified the 2008 crisis and contributed to the erosion of close to $10 trillion in market capitalization from global equity markets in October 2008, the biggest monthly decline on record at the time.

Source: http://www.investopedia.com/articles/economics/09/lehman-brothers-collapse.asp

Another example is from India which I think many generations will remember – The Satyam Crash. Read this: Satyam’s fall: From Rs 542 per share to Rs 58

Read Full story of the Satyam Crash: http://www.financialexpress.com/india-news/satyam-computer-the-rise-and-fall-of-ramalinga-raju/62281/

The Lehman Brothers & Satyam Crash falls in the first and the second category both. Overnight the markets will crash and keep the crash continuing for a long time.

But natural calamity and terror attacks fall under the first category. Stock markets will open big gap down and then from next day onward start to recover.

News like some party election win like recently in UP, and good performance by major companies may push up or down 200-300 points the stock markets and they markets will stabilize. These fall under the first category.

The first category id not a big issue and can be managed with well planned hedged strategies, but the second one is where lot of planning is required.

Continue reading on stock market crash more on how to be well prepared for stock market crash.

Learn why hedging trades is the best way to avoid huge losses from stock market crash as it protects your losses to a large extend and helps you save money.

Date: 06-April-2017

Market Crash is nothing new or unknown. Once in every three years on an average market crashes and then recovers.

Huge crashes are once in a decade. Remember the crash of 2008-09? For one year stock markets all over the world crashed from January, till March 2009. This was almost a 50% crash, and then it took one year to recover.

As far as I remember, it was one of the worst crash in the history of stock markets. Smaller crashes also do come but not every year. Still here is where many traders and investors lose a lot of money which they earned in last 4-5 years of trading.

So how do you prepare yourself from avoiding crash losses?

It is 9 years now since the biggest crash took place, it is important you must be prepared. I am not saying markets are going to crash now, but I know even if they do I am well prepared.

Point is markets crashes or not, what is wrong in being prepared for a crash?

When markets crashed in 2008-09 I had no knowledge of hedging, Today I have.

Hedging is a kind of insurance which protects your capital to a large extend

For some traders who keep shorting stocks – a crash is heavenly sent. These kinds of traders are rare, but they do exist.

Any new trader who enters the market knows only one thing – first buy then sell. They forget that when they buy something, someone out there is selling them the same. It is a different matter that we never know with who sold us the trade or when we sold, who bought it. In fact we will never know as its everyone’s markets and the job of the exchange is to oversee that, our job is to trade.

Unfortunately even traders who short, if they do not hedge their position when markets keep going up they lose money. That is the reason whether you are a buyer or seller you must learn to hedge your positions.

Benefits of Stock Market Crash:

1. Stock Market Crash is the Best Time To Buy Stocks.

Meltdown of 2008. What if someone bought a few shares of HDFC Bank – a well known non-speculative stock on 13-Mar-2009:

HDFC BANK Ltd. 13-MAR-2009

He would have bought it for Rs.166.85 per share. Let say he invested Rs.100,110.00:

Rs.1,00,110/166.85 = Bought 600 shares of HDFC Bank Ltd.

Let see whats today’s price:

HDFC BANK Ltd. 6-APR-2017

It is Rs.1430.00 per share. Let us see his profits:

1430*600 = Rs. 8,58,000.00

Rs. 1 Lakh, 110 coverts to Rs. 8,58,000.00 in 8 years.

800% returns in 8 years.

A Fixed deposit almost doubles the money in same time – 8 years.

Here money multiplied by 8 times in eight years.

Disclosure: Stock markets investments are subject to market risk, please invest after researching well. There is no future guarantee that the above mentioned stock will perform the same in future.

That’s the benefit of a stock market crash, but how may investors actually took that trade? I mean bought HDFC Bank at 166.85 and sold at 1430? None.

Here is where the benefit of stock market crash is never ever seen by anyone. In fact going by the data, not many people bought stocks during that time, else why would markets keep falling for more than one year. The data tells the real story.

Stock Market Crash Is An Opportunity To Buy

Photo-credit: Moneycontrol

A few days back I got this email.

Subject: SALE OF SHARES BY THE STOCK BROKER THAT ARE KEPT UNDER “SHARES AS MARGIN”

Email:

Dear Sir,

Kindly advice and educate me as to the SHARES DEPOSITED UNDER ‘SHARES AS MARGIN’ – CAN BE SOLD by the stock broker for the reason “To meet Pay-in Shortfall” – and reduce the Margin
Limit before the date of settlement/expiry.

Example:

I have a Margin Limit of Rs.10,000/- by deposit of 100 shares of Rs.10/- each.

I bought 50 Call Option of AB company for a premium of 100/- each totalling Rs.5000/- today.

I continue to hold position till expiry which is 20 days away.

On the 2nd day, whether the broker can SELL my 50 shares and adjust the same to my trade amount of 5000/- for the reason – “To meet pay-in short fall”, and reduce my margin limit to 5000/-?

Whether broker is right in doing so?

Please advise me sir.

Regards
VSKumar

This is one thing that is not clear in a lot of traders mind.

Lets us go back to the simple question.

What is Collateral Margin?

Collateral is either shares or property or mutual funds, anything that has monitory value. For example when you take a home or mortgage loan, your home becomes a collateral for the loan.

If you default paying loan EMI for any reason the lender has the right to sell your property and recover his money.

I hope you now understand the meaning of Collateral.

The same law is applied in almost all brokerage firms.

This is known as Collateral Margin.

For example you have bought a few shares totaling Rs. 1 lakh and you do not have any more money in your trading account. For some reason you want to do equity intraday, options and futures trading, but how can you do if you do not have money in your account?

You can ask for “Collateral Margin” from your broker.

Basically you are keeping your shares as a “Collateral” with him to take a loan from him and do derivative trading.

Please note: Collateral Margin percentage differs from stock to stock and broker to broker. Since there are thousands of brokers in India it is impossible to list Collateral Margin given by each broker. Please consult your broker for exact Collateral Margin you will get from the stocks you hold in your demat share trading account.

MAJOR AND IMPORTANT READ THIS CAREFULLY:

1. You cannot buy shares to hold for the long term using Collateral Margin. You can do only equity intraday day trading on any stock allowed for day trading.

2. You can do intraday or positional trading using Collateral Margin in Options and Futures on any stock or Index.

3. If you are losing money in MTM (Mark To Market) at the end of the day, your broker has the right to sell a portion of any stock in your demat account/portfolio to clear the risk of the losses he may face. Note that only that much is sold where the risk becomes zero for the broker.

If MTM losses increases the next day he/she may sell more of your stocks to reduce the risk. They have a limitation of the risk. If the losses exceeds a certain percentage of Collateral Margin given to you, they may sell stock and close your option or future trading to stop the losses from increasing.

In some cases the brokers inform their clients, in some cases, actually most cases, all this is done automatically. The system or trading software takes care of selling the stocks and reduce the risk of losses and send email to the client.

According to the Terms of Collateral Margin, brokers have the right to sell the stocks without informing their clients to reduce the risk as they cannot risk money on their clients behalf.