Here's how you can really make money in trading
By Dhirendra Kumar, CEO, Value Research
1 Jun, 2015, 12.15PM IST
It's an old saying that in a gold rush, the miners may or may not make money, but those who sell them the picks and shovels get rich. This is certainly true of parts of the stock markets, especially short-term trading by individuals.
The other day , while reading the story of Nitin Kamath, the man who has set up Zerodha, India's first and largest discount stock broker, I was struck by the fact he is one of those who has gone over from being a gold digger to a seller of picks and shovels. As narrated by Kamath himself, he was trading on the markets since he was 17 years old. However, after receiving two big shocks on the markets, one during the dotcom crash and the second in 2009, he apparently decided to switch from digging to providing shovels to others.
There's more than a little irony in this story - a man loses big on the markets and decides to get out of trading and creates a business which will help others do the same. However, it perfectly encompasses the experience of practically a good proportion of individual traders on the Indian equity markets, the negative impact being specially amplified by the fact that their activity of choice is highly leveraged derivative trading.
Typically, they make profits for short runs and then make large losses, all amplified by the lever aged nature of their trading.
In fact, it is interesting to see that there is a competition called 'The 60-day challenge' on the Zerodha website, which customers can participate in. All it takes to win this challenge is to not make a loss over 60 days. That's it.
If you come out profitable (any profit at all) at the end of the 60 days, then you've done it --you've cracked the challenge. To the uninitiated like me, this appears to be an astonishingly low qualifying level for an activity whose only goal is supposed to be to earn money, but then I suppose that it must be rare n achievement. enough to be an achievement.
As it happens, Sebi is reportedly trying to limit derivative trading among individual traders. A few days back, there was a report in this newspaper about the Sebi planning to increase the contract size in futures and options trading on the stock exchanges.For the last 15 years, the contract size has been Rs 2 lakh. Reportedly, Sebi now wants it increased to Rs 10 lakh.
The contract size governs the minimum ticket size that a futures or options (F&O) trade has to be. By increasing the contract size, Sebi would like to ensure that, only richer traders would trade in F&O segments.
And why would Sebi want to do that? Clearly, an overwhelming number of individual traders are regularly losing their shirts in derivatives trading. As the logic of trying to limit trading to those who can afford trade with larger amounts, I'm sure it isn't because they are better at making money. Instead, it is the traditional idea that it's OK if richer people lose money on the markets but the small investor must be kept away from risky activities. Maybe there really is something to this line of thinking.
Obviously , brokers and stock exchanges are strongly opposed to what Sebi has proposed as it means lower revenue and profits or them although their official reasons talk about market liquidity etc. Of course, derivatives which are generally called deffendo in India, which makes them sound like a magic spell from the Harry Potter books) have no inherent connection to discount broking.
Discount brokers like Zerodha (and now others too) charge Rs 20 per trade instead of the traditional percent brokerage. If someone is offering lower cost for the service, then that's fine.
If the discounters are doing well, then traders must be finding their barebones services to be good value. It's the larger question of what role derivatives are playing in the Indian markets, that's the real concern.
http://economictimes.indiatimes.com/markets/heres-how-you-can-really-make-money-in-trading/articleshow/47497621.cms
MUMBAI: Similar to e-commerce retailers, online low-cost brokers are slowly but surely making their presence felt. The discount broking industry, running on shoestring promotional budgets, is primarily dependent on word-of-mouth or online publicity, but the growth potential is turning the firms aggressive. At least one discount broker has roped in private equity investors and a high profile brand ambassador to plan a media blitzkrieg. More could follow.
These intermediaries, offering services online, attract day traders and punters with rates that are way below those charged by traditional brokerages who depend on the more expensive relationship manager-based model. For instance, the traditional broker would charge Rs 100 as fee for one lot of Nifty options as against Rs 15-20 charged by a discount broker.
"Discount broking industry is still at a nascent stage in India with very low awareness, but has huge potential for high growth," said Vikas Singhania, executive director of VNS Finance, which owns the discount broking platform tradesmartonline.in.
"Discount broking industry's share has grown from 3-4% of average daily turnover 3 years ago to nearly 11% now, which underlines the growth potential," he added. Tradesmart has grown nearly 3 times in last one year
Notwithstanding the growth potential, small budgets have prevented the industry from splurging on promotional activities. "In a discount model, for example, in airlines industry, top 1-2 players make money, while others struggle. The same is happening in the discount broking industry today," said Nithin Kamath, founder and CEO of Zerodha, which is the market leader with over 60% share and 56,000 clients.
Zerodha, too, depends on word-of-mouth publicity. And, it runs 60-day trading contests for its clients rewarding those who remain profitable.
"To make sure that traders don't get carried away by low cost and overtrade, we have this initiative called '60-day challenge'. If anyone taking the challenge is net profitable after 60 trading days, we refund the entire brokerage paid," said Kamath.
Satish Kumar Dutt, CEO and MD of Compositedge, also said that his firm grew 200% in the past one year, yet the Budget for promotional activities remains as low as Rs 9-12 lakh an annum. AsthaTrade, another discount broker, focuses only on online advertising on websites frequented by traders.
"We are targeting websites which attract traders in order to have a higher conversion ratio. We continuously roll out promotional offers to targeted customers to increase client base," said Satish Chandra Gupta, co-promoter of Astha Credit and Securities.
Amid this, the Mumbai-based discount broker SAMCO Ventures is roping in PE investors and former Indian cricket legend Kapil Dev as brand ambassador to launch 'Indian Trading League' (ITL) in which any stock trader can participate.
ITL, a separate entity formed to host the event, would give away prizes to the best performer every week and every month, with Rs 1 crore to the winner for the whole year. Jimeet Modi, CEO, SAMCO Ventures said the league will be launched this month but declined to share more details.
According to a person involved in the project, Siddharth Mehta, founder of PE house Bay Capital, is acquiring 7.5% in ITL, valuing the outfit at Rs 100 crore. Deloitte India will audit the systems and processesto improve transparency and investor confidence.
Online low cost brokers like Zerodha and Tradesmart give traditional brokers a run for money
MUMBAI: Similar to e-commerce retailers, online low-cost brokers are slowly but surely making their presence felt. The discount broking industry, running on shoestring promotional budgets, is primarily dependent on word-of-mouth or online publicity, but the growth potential is turning the firms aggressive. At least one discount broker has roped in private equity investors and a high profile brand ambassador to plan a media blitzkrieg. More could follow.
These intermediaries, offering services online, attract day traders and punters with rates that are way below those charged by traditional brokerages who depend on the more expensive relationship manager-based model. For instance, the traditional broker would charge Rs 100 as fee for one lot of Nifty options as against Rs 15-20 charged by a discount broker.
"Discount broking industry is still at a nascent stage in India with very low awareness, but has huge potential for high growth," said Vikas Singhania, executive director of VNS Finance, which owns the discount broking platform tradesmartonline.in.
"Discount broking industry's share has grown from 3-4% of average daily turnover 3 years ago to nearly 11% now, which underlines the growth potential," he added. Tradesmart has grown nearly 3 times in last one year
Notwithstanding the growth potential, small budgets have prevented the industry from splurging on promotional activities. "In a discount model, for example, in airlines industry, top 1-2 players make money, while others struggle. The same is happening in the discount broking industry today," said Nithin Kamath, founder and CEO of Zerodha, which is the market leader with over 60% share and 56,000 clients.
Zerodha, too, depends on word-of-mouth publicity. And, it runs 60-day trading contests for its clients rewarding those who remain profitable.
"To make sure that traders don't get carried away by low cost and overtrade, we have this initiative called '60-day challenge'. If anyone taking the challenge is net profitable after 60 trading days, we refund the entire brokerage paid," said Kamath.
Satish Kumar Dutt, CEO and MD of Compositedge, also said that his firm grew 200% in the past one year, yet the Budget for promotional activities remains as low as Rs 9-12 lakh an annum. AsthaTrade, another discount broker, focuses only on online advertising on websites frequented by traders.
"We are targeting websites which attract traders in order to have a higher conversion ratio. We continuously roll out promotional offers to targeted customers to increase client base," said Satish Chandra Gupta, co-promoter of Astha Credit and Securities.
Amid this, the Mumbai-based discount broker SAMCO Ventures is roping in PE investors and former Indian cricket legend Kapil Dev as brand ambassador to launch 'Indian Trading League' (ITL) in which any stock trader can participate.
ITL, a separate entity formed to host the event, would give away prizes to the best performer every week and every month, with Rs 1 crore to the winner for the whole year. Jimeet Modi, CEO, SAMCO Ventures said the league will be launched this month but declined to share more details.
According to a person involved in the project, Siddharth Mehta, founder of PE house Bay Capital, is acquiring 7.5% in ITL, valuing the outfit at Rs 100 crore. Deloitte India will audit the systems and processesto improve transparency and investor confidence.
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