Do’s and don’ts of trading on budget day
The word “budget” is derived from the French word “Bougette” which means “Small Bag”. It is adopted from the British, who used to carry a budget box since the 1980’s. The first finance Minister who carried the briefcase was RK Shanmukham Chetty in his first budget speech in 1947.
A risk averse person always opts to stay out of trading on the budget day because of the volatility factor and quick decision making. But there are other people who wait for opportunities like this to start trading in the market on specific events like the budget.
One thing you need to remember is that budget day carries a lot of weight age in stock price movement and decision making. So no matter what strategy you have entered before the budget day, the current announcements made in the budget will impact your strategy. Long term investors should not really bother too much but must keep an eye on announcements that can change the course or future of a stock or the industry. In-fact, if such news are likely to be announced in the budget, you will get feelers in advance itself and take necessary corrective action.
Volatility – Volatility in the market on budget day will be high for sure. One announcement can see a very swift and steep fall or rise in the market. As the markets move very swiftly, it will get harder to trade. So, do your research well in advance and keep all your strategies ready for any type of announcement.
Margins – Now, brokers collect margins to cover the risk of high volatility during the budget. This year the margins are likely to be even higher than you years gone by. SEBI has directed the exchanges to collect higher margins from the broker because the markets are at an all-time high and the volatility in the markets is higher, the risk is higher and so the regulators do not want cases of default by clients or brokers. So, if you plan to invest on the budget day be prepared to pay higher initial margins and also you would need some additional funds due to higher chances of MTM margin calls.
Risk and reward – The capital you have invested on budget day is at a higher risk than in a regular market. The reward you receive is not as high as the risk you are willing to take. So you take higher risk with a chance of not as high return. But the gains you will get is very fast. Even though the reward is lower but the time involved is lesser. So it does make sense when you get rewards faster.
Entry Price – The ideal price at which you want to enter the market may or may not be available on budget day. There are too many announcements on that day and the dust will take time to settle. So, have some patience but do keep additional room for the froth in the market where prices are not ideal and yet settling.