Risk management for delivery trades

A delivery trade means you buy shares and hold them in demat for days, months or years. There is no daily margin call, which makes it feel safe. The risk is slower, larger and easier to ignore.

1. Decide what you can lose before you buy

Write down the maximum percentage of your total capital you are willing to lose on a single holding, for example 1% to 2% of the portfolio. This is separate from how much you invest. A position can be 10% of your capital and still risk only 1% if your exit point is 10% below your entry.

position size = (capital x risk %) / (entry price - exit price)

Example (hypothetical): capital 10,00,000, risk 1% = 10,000. Entry 500, exit level 450, so risk per share is 50. Quantity = 10,000 / 50 = 200 shares, a position value of 1,00,000 (10% of capital).

2. Limit concentration

• Cap any single stock (many investors use a ceiling such as 5% to 10% of the portfolio).
• Cap any single sector. Several banks, several IT exporters or several PSUs are one bet, not many.
• Count hidden overlap: mutual funds and index funds may already hold the same large stocks.

3. Check liquidity and quality before size

• Look at average daily traded value and bid-ask spread. A thin stock can fall 10% on small selling and you may not be able to exit.
• Read the latest filings on the exchange websites. Pay attention to promoter pledging, debt levels, auditor changes and related-party dealings.
• Check whether the stock is under an exchange surveillance framework.

4. Plan the exit in both directions

Decide, before buying, what would make you sell at a loss (a price level, a broken thesis, a governance event) and what would make you trim a winner (position grown above your cap, valuation no longer fits your thesis). Without a plan, losses are held out of hope and winners are sold out of fear.

5. Handle event and gap risk

Results, regulatory orders, promoter actions and global shocks can move a stock sharply at the open. A stop-loss does not protect against a gap. Reduce position size before known events if the stock is volatile.

6. Stagger entries

Buying in two or three tranches reduces timing risk. Averaging down is different: add only if your original reasoning still holds, never just to lower the average price.

7. Know the costs

Brokerage, STT, exchange charges, GST, stamp duty and DP charges apply, and short-term and long-term capital gains tax rules apply to profits. Frequent trading in small amounts can make costs a large share of returns. Check current rates with your broker and the Income Tax Department; rules change.

Review checklist

• Largest position under my cap?
• Largest sector under my cap?
• Any holding I could not sell within a day at a fair price?
• Do I know my exit level and the thesis for each stock?