How to select best stock for short term trading?

You must have heard the name of Rakesh Jhunjhunwala and many such stock market experts who built a huge empire with very little money. But do you know that there is a very famous rule in the world of the stock market? The name of this unwritten famous rule is “Rule 90/90/90” which means 90% of people lose 90% of their assets in just 90 days.

Are you also interested in the share market? Dear, it is not wrong to be interested in the share market, but going into the share market without any information and investing your money and leaving the share market in frustration after suffering a loss can definitely remove the share market from your heart and mind forever.

Some great people have said that if I am given a task to do in a limited time, then I will spend about half of my time in making a strategy on how to do that task and the remaining half time doing that task.

In the share market, you have to think beyond this, buying or selling a share is a matter of much later, first of all, you have to spend 90% of your time understanding the basic information of the share market and its graphs, charts, balance sheets of companies.

In this article, we will tell you, how to do intraday trading i.e. How to select best stock for short term trading? First of all, we will tell you about some fundamental things which you will have to follow, after that we will tell you the process and we will also highlight what precautions should be taken during this.

In this article, we will discuss in detail those important points, which will be helpful for you to understand and successfully implement investment in the stock market. Whether you are an intraday trader, a long-term investor or someone who is new to the stock market, this article will prove useful for you.

Importance of Liquidity

Liquidity simply means that the stock can be bought or sold immediately without reducing the price. When you invest in a stock, it is very important to know how much liquidity is there in that stock. This is a very important factor, especially for those who do intraday trading. Intraday trading means buying and selling shares in a single day.

Liquidity plays a key role in this type of trading because if a stock does not have liquidity, it may be difficult to sell or buy it at the right time. If a stock has low liquidity, you may not be able to sell it at the price you wanted to, and you may suffer a loss as a result.

How to measure liquidity?

To measure liquidity, you can look at the daily trading volume of the stock. Stocks that have a higher trading volume tend to have more liquidity. Also, stocks of companies with a large market cap usually have more liquidity because the shares of these companies are traded more frequently.

Stocks of large companies such as Reliance Industries, Tata Consultancy Services (TCS), HDFC Bank, SBI, Bharti Airtel, Infosys, Hindustan Unilever, etc. have more liquidity, so these stocks can be good options for both intraday traders and long-term investors.

Liquidity and small investors

Liquidity is also an important issue for small investors. If you are a small investor and investing in the stock of a company with a small market cap, the stock may have low liquidity. This means that when you want to sell it, you may find it difficult to sell it at the price you were planning to sell.

Therefore, you should always invest in stocks that have good liquidity, so that you can sell your shares at the right price at the right time.

Volatility: What does it mean for investors?

Volatility means fluctuations in the stock price. The higher the volatility, the faster the change in the stock price. This change brings both risk and opportunity for investors. Volatility is an important factor especially for intraday traders, as they try to make profits in the short term.

How does volatility affect?

Volatility refers to rapid fluctuations in the stock price. If a stock is highly volatile, its price can fluctuate drastically within minutes. Intraday trading requires that the stock price changes constantly so that the trader can make a profit.

For example, if a stock is trading at Rs 100 in the morning and reaches Rs 110 at the end of the day, the intraday trader can make a profit in the meantime.

How to manage volatility?

Use stop losses: Stop losses are a way to limit your losses. When a stock’s price is not moving as you expected, stop losses help you sell your shares at that level to minimize your losses.

Analyze sensitivity: To know the chances of volatility, you need to understand what external and internal factors can affect the stock price. The company’s financial position, industry conditions, global economic conditions, and government policies can all impact the stock price.

High volatility stocks: Some stocks are generally more volatile. For example, penny stocks, have low prices and high volatility. You should be more cautious while investing with them.

Large market cap stocks: A safe way to invest

Market cap means the total value of all the shares of a company present in the market. Based on the market cap of a company, it is divided into three categories: large-cap, mid-cap, and small-cap.

Characteristics of large market cap stocks

Large market cap stocks: Means shares of large companies that have a very large market cap. Usually, these companies have a stable position and have a stronghold in the market.

For example, shares of big companies like Reliance Industries, Tata Motors, and HDFC Bank fall under the category of large-cap stocks.

Stability and safety: Large-cap companies are financially strong and have stability in their businesses. These companies have been in the market for a long time and their position remains relatively stable. Therefore, you do not take much risk by investing in the shares of these companies.

Liquidity: Shares of large-cap companies usually have high liquidity, meaning you can buy or sell them easily. This means that if you need to sell your shares, you can redeem them immediately. They can be sold without any difficulty.

Long-term growth: Large-cap stocks can be a good option for long-term investment. They do not have a lot of sudden growth, but they can give you stable and safe returns over time.

Investing in large-cap companies has many advantages:

Low risk: Large companies have less risk as compared to small companies.

Stable returns: These companies grow slowly, but give stable and safe returns to investors.

Investor confidence: Investors have more confidence in large companies because they have a good reputation.

Comparative study of large-cap and other stocks

Compared to small-cap and mid-cap stocks, large-cap stocks have less volatility. While small-cap companies have the potential to grow rapidly, they also have more risk.

On the other hand, mid-cap stocks are those of companies that are growing fast, but still not as stable as large-cap companies.

Importance of Market Trend and Sector Trade

It is very important to analyze market and sector trends before investing in the stock market. Market trend means the direction in which the market is going: Bullish (upward) or Bearish (downward).

Market Understanding, market trends, and sector trade in the stock market help you make the right investment at the right time. Let us now know in detail how market and sector trends can be analyzed and how to include them in your investment decisions.

What is the market trend?

The market trend reflects the overall direction of the stock market. It has two major types:

Bullish Trend: When the market is moving upward and investors are positive, it is called a bullish trend. In this situation, investors expect the stock prices to move further, allowing them to earn more profits.

Bearish Trend: When the market is going downward and there is disappointment among investors, it is called a bearish trend. At this time investors are in the tendency to sell shares because they fear that prices will fall further.

How to understand market trends?

To understand the market trend, it is important to study many factors:

Economic news and figures: Economic figures such as GDP, unemployment rate, inflation, etc. have a big impact on the market. If any positive economic news comes, such as an increase in GDP or a decrease in unemployment, then a bullish trend can be seen in the market. Similarly, negative news such as recession or global instability can cause a bearish trend.

Financial condition of the company: Quarterly reports or other financial figures of a company also affect the market trend. If the report of a big company comes positive, then the shares of that company as well as the shares of other companies can go up, which creates a bullish trend.

Government policies: New policies coming from the government, such as tax exemptions, new industrial schemes, or changes in interest rates, can change the direction of the market. For example, if the government announces new infrastructure projects, the shares of infrastructure companies may rise.

What is sector trade?

Sector trade means focusing on a particular industry or sector. There are various sectors in the stock market, such as banking, IT, FMCG, pharmaceuticals, automobile, energy, and real estate, etc.

Sector trade means that you invest in the sector that is performing well at a particular time. For this, you have to see in which sectors the investor interest is increasing and in which sectors there is a recession.

How to do sector trading?

To do sector trading, you should keep the following things in mind:

Analysis of government policies: Government policies can have a big impact on a particular sector. For example, if the government is focusing on rural development, the stocks of agriculture and agro-based companies may surge.

Global trends: Global markets and events also impact the sector. For example, if crude oil prices are rising globally, the stocks of energy and oil companies may surge.

Industry trends: Every industry has its own cycle. For example, innovations keep happening regularly in the IT and technology sector, which keeps attracting investments in this sector. At the same time, some sectors like real estate or automobile take more time and have slower cycles.

Special events: Sometimes special events like natural disasters, epidemics, or war can also have a big impact on a sector. For example, during the COVID-19 pandemic, the pharma and healthcare sectors made huge profits, while the hospitality and travel sectors suffered a major decline.

Time the market and sector trends correctly

You have to understand that market and sector trends keep changing constantly. Therefore, it is important that you take advantage of these trends at the right time.

For this, regularly analyze news, economic data, and company reports. You can focus your strategy on sectors that are expected to grow in the future

Lower and Upper Circuit: Important Information for Risk Management

Lower circuit and upper circuit in the stock market are standards that are imposed to prevent excessive price fluctuations of a stock. The stock exchange implements these standards so that stability is maintained in the market and investors are not affected by sudden large fluctuations in a stock.

What is an upper circuit?

When the price of a stock rises too much in a day, the stock exchange imposes an upper circuit on it. This means that the price of the stock cannot rise beyond a certain limit for that day. This is done so that there is no abnormally high volatility in the stock and the market remains stable.

For example, if a stock is in its upper circuit at 10% and the price of the stock is Rs 1000, then its price cannot go beyond Rs 1100 on that day.

What is a lower circuit?

A lower circuit is applied when the price of a stock falls very sharply. When the price of a stock falls to the lower circuit limit, its price cannot fall further for that day. This is done to protect investors from uncontrolled decline.

For example, if a stock is in its lower circuit at 10% and its price is Rs 1000, then its price cannot go below Rs 900 on that day.

Importance of Circuit Breakers for Investors

Circuit breakers are a way for investors to control risk. They help you ensure that your investment is protected from sudden large fluctuations.

If you are investing in stocks that have high volatility, then it is important to take care of circuit breakers. This lets you know the extent to which the stock price can rise or fall and you can secure your investment accordingly.

How to use circuit breakers?

Trading strategy: If an upper or lower circuit has been applied to a stock, it indicates that there is a lot of volatility in that stock. In such a situation, you can change your trading strategy accordingly. If you think that the stock price can rise again after the circuit is over, then you can hold it, or if there is a possibility of a decline, then you can sell it.

Set stop loss and target price: To take advantage of circuit breakers, it is good to set a stop loss and target price. This helps you to limit your losses and secure profits when prices become uncontrolled.

Moment trading: Taking advantage of market fluctuations

Moment trading is for those traders who want to take advantage of rapid changes in stock prices in a short period of time. Its purpose is to make quick profits, but for this, it is very important to predict the correct direction of the market and make quick decisions.

How does moment trading work?

In moment trading, traders focus on a particular moment when the stock price is rising or falling rapidly. They take advantage of this time to either buy shares (when the price is likely to rise rapidly) or sell (when the price is likely to fall).

For example, if a company releases a quarterly report containing better-than-expected results, the stock price of that company may rise sharply. Moment traders buy shares quickly at this time and then sell them when the price rises to make a profit.

Essential steps for moment trading

Timing: Time is very important in moment trading. If you react late, you may miss that moment and miss the opportunity to make a profit.

Technical analysis: Technical analysis is very important in moment trading. By analyzing charts, indicators, and patterns, you can understand when the stock price is going to increase rapidly and when you can buy or sell.

Keeping an eye on news and information: Moment traders always keep an eye on the latest news and information. Company announcements, quarterly reports, new projects, etc. can cause rapid changes in stock prices, which can be taken advantage of through moment trading.

Advantages and Disadvantages of Moment Trading
Moment trading gives you the opportunity to make quick profits, but it also comes with high risk. If you do not make a decision at the right time or make a wrong forecast of the market direction, you may suffer losses.

Therefore, moment trading is suitable only for those who understand market dynamics and are adept at risk management.

Long-term investing: Strategy for long-term gains

Long-term investing is a strategy in which investors hold stocks for a long time so that they can get long-term benefits. It is ideal for investors who want stability and growth in their portfolio, and who are looking for long-term gains while hedging risk.

Advantages of long-term investing

The benefit of compounding: The biggest advantage of long-term investing is that it provides the benefit of compounding. When you hold your investment for a long time, the returns on your capital are reinvested, making your investment grow faster.

Managing risk: Short-term investments in the stock market can be very costly. Long-term investing can be a safe strategy to avoid the volatility of the market. When you hold your investment for a long period, you are not affected by temporary fluctuations in the market and your investment gets stability.

Low expenses: Long-term investments have low trading expenses because you do not buy and sell frequently. This reduces your total investment cost, which increases your profits.

Suitable stocks for long-term investment

For long-term investment, you should invest in the shares of companies that have strong financial positions and stability in their business model. For example, large-cap companies such as Reliance, Tata, and HDFC Bank are considered good for long-term investment.

How to plan for long-term investment?

Be patient: You have to be patient in long-term investment. You should not panic due to small fluctuations in the market. Give time to your investment to get long-term benefits.

Build a balanced portfolio: Maintain diversity in your portfolio. You can reduce your risk by investing in different sectors and assets.

Review regularly: Despite long-term investments, review your portfolio from time to time. If a company is performing poorly or a sector is declining, make changes in time.