5 factors you should consider before subscribing to a stock recommendation service
You are supposed to execute and track the trade ideas given by the stock recommendation service. The service provider's job ends when he sends out the recommendation.
A buoyant stock market attracts many first timers in the ring. But seldom do they understand the tricks of the trade. Even the old timers find it attractive to increase their trading activities in trending markets. In both the cases, they end up buying what their brokers recommend. The more serious lot goes for subscribing a stock recommendation service. No wonder, there are many available at the click of a button — charging from Rs 5,000 per month to lakhs per year. If you are one of those, wondering if you should subscribe to one such service, here is how to do it. Most experts advise defining your needs first and checking if the needs are being met by these subscription services. You should also check the track record of the service providers among other factors. Let’s look into the factors in detail that influence the decision.
Your needs: Though most individuals want to check the credentials of the service provider first, most experts want you to start with yourself. If you are looking for regular income, then you should opt for a day trading recommendation service. If you are looking for long-term wealth creation, opt for services that have picked stocks offering multi-fold returns based on fundamentals or a mix of technical and fundamental factors.
“Ask yourself if the service objective will help you cater to your investment needs,” says Rahul Goel, CEO of Equitymaster, a stock recommendation services firm based in Mumbai. There is no point signing for a service that does not serve your purpose. If you intend to go to Delhi from Mumbai, why buy a ticket for a Mumbai-Chennai flight. If the goals match, then you can move to the more operational issues.
Capital requirement: Depending on the service offering, the need of capital changes. In such services, the providers keep giving stock recommendations. In the case of positional trades, wherein one takes the position for a few days, there may be five to ten trades open at any given point of time. If the trades are done in futures and there are 10 positions open, it can be assumed that you need around Rs 10 lakh at hand to fulfill only margin requirements. You have to account for possible losses too.
Please note, you are expected to trade on all recommendations given by the service provider. If a service provider gives 10 recommendations and 7 out of them hit the target, then the success ratio is 70%. If you decide to pick and choose three from these recommendations, then your success ratio may change depending upon what you have chosen to trade.
So, better ask the service provider as to how many calls are given in a given time frame and how many remain open at any given moment of time. This will help you judge the capital requirement better.
There is another dimension to this. “If your capital employed is not more than your annual income, it is not a serious activity as the impact on your overall networth would not be optimal,” points out Nooresh Merani, Sebi registered investment advisor and founder of NooreshTech. It would be better to devote more time to your vocation and build your corpus before you want to be a focused trader.
Can you handle it: Subscription services simply send you SMS or email with the details of the security to be bought or sold at a given price. “The trade execution is in your hand. You should be in a position to enter and exit the position on your own,” says Jignesh Shah, founder of Mumbai based Capital Advisors.
If you are not a full timer, you have to consider this aspect in greater detail. If the call is not executed at the time it is given, it may be an opportunity lost. Especially in day trading, it can be a big miss. Even if you manage to enter a trade, you should also be in a position to close the trade at the right time.
The discipline and the mental framework required to trade is also an important issue. Many times individuals give up if the recommendation service’s initial calls land them in losses. Please note, it is all about average success rate. Not all trades make money and you should have both the money and mind to trade as per a given strategy for a pre-defined period which can be from a month to six months.
Credentials of the service provider: If you are sure that you can handle the recommendations-based investments on your own, it is time to look at the service providers. A search online will expose you to the world of subscription services. But don’t jump to pay for one that claims to offer ‘sureshot calls’. The credibility of the service provider is important. To begin with, the service provider should be a SEBI-registered investment advisor.
“Do check how long the service provider company has been offering the recommendation services. The company should have been around over market cycles,” says Goel. You may come across some of the tall claims of high double-digit returns over the past one month, but do not get overwhelmed by such short-term focused claims. “Do check the team behind the service and the process that generates the stock recommendations. Check the performance in both bull phases as well as bear phases,” Goel adds.
If you are not sure about the performance numbers of a service provider, do ask for references. “If the service provider gives you a reference, then ask that person in detail about the service and his experience in detail,” says Nooresh Merani. Probing questions can help you to avoid not so serious service providers.
Fees & charges: The price tags for the subscription services is a wide range from Rs 5,000 to a few lakhs. And it may be difficult to choose a service provider. The costs must be seen in the light of the performance of the service provider and in the context of capital employed. Jignesh Shah says, “Costs are an important factor and you should be getting returns in addition to the broad markets after accounting for all costs.”
Nooresh Merani says, “In no circumstance, one should pay more than 2.5% to 3% of your corpus, as mutual funds charge that much to manage your money.” If you are paying more than this threshold, then either you are overpaying or you have to employ more capital. In both the cases, stay invested through mutual funds.While these factors may help you to decide if you should go for a stock recommendation service and you may choose the right service provider for yourself, do not forget to review. “Keep a track of all recommendations and your trade. A periodical review will help you assess the value that service providers add to you and you will be making more informed decisions,” says Jignesh Shah.