The stock market indices have seen a run-up since the time exit polls predicted that the Narendra Modi-led National Democratic Alliance (NDA) will comfortably manage majority in the Lok Sabha elections 2019. The Sensex and Nifty have already risen around 4% since the exit poll announcement. On 23 May, analysts say anything above 270 seats for the Bharatiya Janata Party (BJP) will be a positive for markets. But the point is that most of the good news has already been factored in by the market. Hence, profit-booking is likely once the initial euphoria wanes. Also, if the exit poll predictions go wrong, the markets may hit the panic button.
So, in order to keep your capital safe, small investors should avoid making these five mistakes while trading in stocks on 23 May:
1) No bargain-hunting: Markets are expected to remain highly volatile on Thursday. The Sensex and Nifty would closely track the seat trends. Brokerage firms are advising small traders to avoid following an aggressive approach. Investors should not hurry to buy stocks at a bargain when they dip, as a bigger correction could be under way. For medium- and long-term investors, it is advisable to wait till full clarity emerges on where the markets are heading.
2) No high-beta stocks: The current rally in high-beta stocks, which include midcaps and smallcaps, is based on one single event-- elections. Fundamentals are not backing up valuations here. Hence trading in these stocks comes with a fair share of risk. Small investors are advised to trade in good-quality largecap stocks where the downside risk is less in case of an unlikely event.
3) Don’t trade without stop losses: Stop loss is generally used by a trader who intends to enter a trade with a short-term/intraday view. A stop-loss order is placed with a broker to buy or sell once the stock reaches a certain price. It is basically designed to limit an investor’s loss on a stock position. On a day when markets can go in either direction, it is wise to place stop-loss trades. But the key is to pick the correct stop-loss percentage that allows a stock to fluctuate in its range while preventing as much downside risk as possible.
4) Don’t keep all your eggs in one basket: Many brokerage firms have been predicting that cyclicals and rate-sensitive stocks would perform well if the NDA govt returns to power. However, these stocks are also quite vulnerable to correction as well if the final seat tally doesn’t match the exit poll predictions. Hence, small investors should add some quality defensive stocks from the pharma and IT sector in their portfolio to hedge their investments.
5) Don’t hold on to weak stocks: A sentiment-driven rally after the election verdict cannot be ruled out. A large section of the market would choose to overlook the near-term headwinds and start valuing the markets on imaginary earnings estimates. For savvy investors, this hope rally should be an ideal opportunity to exit weak positions in the portfolio.
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