“In the stock market, it is important to be fearful when others are greedy, and greedy when others are fearful!”
In a haste to make a quick buck from the market, investors tend to overlook the fundamentals of the company they’re planning to invest in. Often, we buy shares without sparing time to gather basic information about the company, most importantly the product or service that the company sells and the probable future for that business. It is essential to look at companies that have consistently delivered earnings growth and good corporate governance. Never invest in a firm without understanding the dynamics of the business.
Here is a checklist to ensure that your money serves you well in the stock markets:
Look beyond “short-term gains”
We often tend to look for short-term gains. If you want to make a quick profit from stocks, you should have the ability to time the stock market. Stock prices fluctuate wildly over short periods. Your profit or loss depends on your ability to clinch the deal at the right moment. Due to the turbulent nature of stock markets, it is difficult to profit in short-time periods. This makes the deal go bad! Often, for a small short-term gain, you may be losing out on an exponential long-term profit.
The equity market almost invariably gives a positive return in the long term, in this case a time horizon of at least three or more years will be most prudent. Also, when you stay invested in a stock for longer than one year, the gains are tax-free.
Look out for what is ‘cheap, but expensive’
Search for “bargain stocks” – the ones which are available for prices lower than their worth and have a strong growth potential. This is not the same thing as buying cheap stocks at a higher quantity. Look at it like this: assume that you can buy a dozen fresh eggs for Rs 36, while rotten eggs are available for only Rs 3 per dozen. If you have Rs 3 in your wallet, will you buy one fresh egg or a dozen rotten ones?
Rule: Returns from your investment in shares do not depend on the number of shares, but the performance of the company. You will have a higher chance of making a profit if you buy just one share of a blue-chip company rather than buying thousands of penny stocks
Do not ignore your portfolio
If you are among those who think that long-term investment means buying shares at low prices and forgetting about them, you are taking a huge risk. The economic environment and market scenario are very dynamic. Apart from global and local policies and macroeconomic factors, there can also be changes in company strategies or management.
While investing in the stock market, it is important to review your portfolio at regular intervals. If the outlook of a company improves, or at least remains stable, it is worthy to buy or hold the stock. When the assumptions under which you’ve bought the shares no longer hold true, it might be time to offload them.
Learn to book losses
Investors eagerly cash out small profits on retail investments, but they are often unwilling to book losses on stocks that are sinking. Even when stock prices keep declining, they continue to hold on in the hope that the stock will bounce back and turn profitable sometime. This often results in bigger losses for the investor.
When prices decline, some investors buy more shares in an attempt to reduce the average cost of their stock portfolio. Buying on dips is recommended, but only when the decline is due to a temporary setback and growth prospects remain positive.
Here’s what you could do instead: when investing in a stock, you should also set a stop-loss instruction for it. When the price of a stock falls to the stop-loss level, the broker will sell them. If you set a stop-loss order at 10% below your purchasing cost, your loss will be limited to 10%.
Invest in a business you understand
We often tend to invest in a company about which we have no idea – we don’t even know what exactly the company does.
Never invest in a stock. Invest in a business instead. And invest in a business you understand. In other words, before investing in a company, you should know what business the company is in.
Diversify your portfolio
We’ve heard the saying “don’t put all your eggs in one basket”. The same applies to an investment portfolio in the stock market as well.
Diversification of portfolio across asset classes and instruments is the key factor to earn optimum returns on investments with minimum risk.
Don’t allow your broker to trade without your approval
If you just sign the forms on your agent’s instructions and allow him to buy and sell shares on your behalf, be ready for a few shocks. Unscrupulous brokers often use this opportunity to misuse clients’ money.
Brokers don’t get a commission on the profit you earn, but get paid for trade volume. There have been cases of brokers using investor money for intra-day trading without investors’ consent. When you get a statement from your brokerage house, you might see your portfolio running losses with a huge amount paid as brokerage.
And, the golden rule is: emotions are your worst enemy in the stock market! Be disciplined, and follow these rules, and chances are, you’ll beat the stock market in returns!