InvestorQ : Is there any specific reason why I must not sit on cash for too long?
manisha Kolvenkar made post

Is there any specific reason why I must not sit on cash for too long?

3 years ago

When you sit on cash for too long you are defeating the basic premise of trading which is to put your money to aggressive use. The whole idea of trading is to churn your capital aggressively so that the ROI is expanded. The crux of trading is that you target around 2% ROI per week and use a mix of strategy and discipline to repeat this performance as often as possible. If you sit on cash then you are not losing money but then that is not the reason you became a trader in the first place.

Like it or not, money has an opportunity cost. There are various reasons for that. You may have borrowed that money from someone and you are paying interest on that. You need to earn returns to service that cost. Alternatively, this money may be your own funds but then own funds also have a cost just as equity has a cost. You cannot ignore this cost and if your cash idles then you are losing out on opportunities and could have possibly put your money to better use.

Trading is not only about strategy and discipline but it is also about habit. You need to get habituated to thinking and behaving like a trader. By sitting on cash for too long you are going to lose out on being a successful trader by practice. The more you trade, the more you will learn along the way and a better trader you become eventually.

The biggest cost in trading is loss of opportunities. When you sit on cash you miss out on a plethora of opportunities. You may miss out on shorting opportunities, you may miss out on volatile strategies and you may miss out on defined limit strategies. Sitting on cash is idling your trading skills and has a huge cost which you must appreciate.

The real capital in trading is the initial capital multiplied by the velocity of circulation. So if you have a base capital of Rs.5 lakh and you leverage it to 5 times and you churn the capital 20 times in a year then your actual capital is Rs.5 crore. This kind of virtual leverage is possible only if you put your money to constant use. By idling your money you are losing out on your potential virtual capital.

Sitting on cash for too long may make you a conservative trader. That means you actually lose out on the variety of opportunities in the market. Also, the merits of sitting on cash can be quite comforting as you do not lose money and that can induce you to increase the tenure of cash holding. That is anathema for a trader whose primary focus should always be to churn money and tap opportunities in the market.