Last Updated on 19 September, 2022 by Samuelsson
According to the Hindu calendar, Diwali (the Festival of Lights) is an auspicious time that symbolizes the victory of light over darkness. As with any religious festival, there is a plethora of beliefs, customs, and traditions that surround it, and one such tradition is Muhurat trading. And you ask: what is Muhurat Trading?
Muhurat trading is a special one-hour trading session on Indian stock exchanges on the day of Diwali. It is a common ritual followed by the traders in India who consider that one-hour period on the day of Diwali auspicious for trading shares. This symbolic trading session marks the beginning of Samvat — a new Hindu accounting year. All the trades executed during the Muhurat trading session result in settlement.
The topic will be discussed under the following subheadings:
- What is Muhurat Trading?
- The history of Muhurat Trading
- What happens in Muhurat Trading?
- Who can benefit from Muhurat Trading?
- What to keep in mind before engaging in Muhurat Trading
What is Muhurat Trading?
Muhurat Trading is a common and old ritual practiced by traders in India. It is a one-hour time that is considered auspicious on the day of Diwali for investing in shares. It is believed that people trading during this one hour have a better chance of earning wealth and gaining prosperity throughout the year. The stock exchange specifies the exact time of Muhurat trading every year. Typically, this period is during the evening of Diwali, and most people prefer buying stocks as a token of Goddess Lakshmi.
The history of Muhurat Trading
The origin of Muhurat Trading is that stockbrokers traditionally started their new year from the day of Diwali, and they usually open new settlement accounts for their clients on Diwali during the auspicious moment – Muhurat. During that period, brokers would also perform Chopda Pujan (worship their books of accounts).
There were many beliefs that were associated with Muhurat trading, but the key one was that most Marwari traders/investors sold stocks during the Muhurat since they believed that money should not enter the house on Diwali, and Gujarati traders/investors purchased shares during this period.
In recent times, however, Muhurat trading has become more of a symbolic gesture than a cultural one because people believe the period to be auspicious. What Hindu investors do now is to perform pray to Goddess Lakshmi and then purchase shares of strong companies that can generate good returns in the long run.
What happens in Muhurat Trading?
On the day of Diwali, both the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) allow one-hour trading. The session is typically divided into the following parts:
- Block Deal Session: Two parties agree to buy/sell a security at a fixed price and inform the stock exchange about it
- Pre-Open Session: It is usually about eight minutes to the normal market session, and the stock exchange determines the equilibrium price
- Normal Market Session: This is the one-hour session where most trading takes place
- Call Auction Session: This is where illiquid securities are traded.
- Closing Session: At this point, traders/investors can place a market order at the closing price
Who can benefit from Muhurat Trading?
Muhurat Trading is a good time for investors and traders, both experienced and new, to benefit from trading the market. It is meant for people who believe in auspicious planetary alignments, which Muhurat represents, and Diwali is celebrated for bringing in wealth and prosperity. So, traders who have never invested in stocks may find that Diwali can be a good day to begin.
Of course, experienced day traders can also benefit from this session since most investors/traders will buy and/or sell stocks as a gesture to acknowledge the auspiciousness of the day. Note that the focus might not be on profitability as much as it might be on the gesture. As such, seasoned day traders can make good profits by taking positions carefully.
Dos and Don’ts of Muhurat Trading
Here are the dos of Muhurat Trading:
- Look for high-quality and large-cap companies
- Purchase some stocks with a long-term horizon in line with your investment plan.
- Observe the market and paper trade if you are new to trading because the session is known to be very volatile since it is open for only an hour
The don’ts are as follows:
- Placing large order since liquidity is low during the session
- Getting carried away by the festive spirit; remain focused on trading according to your plan
- Making trades based on rumors
What to keep in mind before engaging in Muhurat Trading
Here are a few things to keep in mind:
- At the end of the trading session, all open positions will result in settlement obligations.
- Most traders and investors consider this period to be auspicious to make investments, but don’t be carried away by the excitement.
- Ensure you stick with the fundamentals of a company before investing in its stock for the long term.