How Can One Invest in the Stock Markets Without Burning One's Fingers?
There is a famous saying “Better a thousand times careful than once dead”. Neglecting safety can have fatal consequences. Does one go riding without a helmet? Isn’t it foolish not to fasten seatbelts while driving? In a similar manner jumping into the stock market without having any idea of what it entails is foolish. “An investment in knowledge pays the best interest” is a saying which best emphasis the need for arming oneself with knowledge before making the leap into the stock market.
Keep an eye on your finances
One of the first things one needs to ask himself before investing in the stock markets is Can one afford to lose money in the stock market?
• Is the money invested in the stock markets necessary for one’s children’s education and if one suffers a loss does it put his family in difficulty?
• Is one in debt and has taken multiple loans such as a home loan and a personal loan which mean huge EMI’s each month?
One would need to clear up all debts, set aside emergency funds to meet any contingency and only then invest the remaining amounts in the stock market.
Set up an investment plan
“Failing to plan is planning to fail”. One needs an investment plan to invest in the stock markets especially if one is a novice in this field.
- One needs to ask himself why he is investing in the stock market? Stock market investments are for the long haul .One needs to set a time horizon of at least three years in order to cash in on his investments.
- Investing with the hope of making a quick buck in the stock market is a dangerous approach.
- Invest in good quality stocks (Blue chip stocks) of highly reputed Companies. One can be assured that in most circumstances these Companies would still be around 5-10 years later and the stocks would give good returns. Imagine investing thousands of rupees in stocks of Companies with no great reputation and finding them null and redundant after a few years. One needs to do strong research before narrowing down the best picks and then invest in them.
One needs to decide which is the best time to buy
- Just got a huge profit from business? Thinking of dumping the lot into the stock market. Well think again .Investing in the stock markets is all about spacing. One needs to space his investments in the stock markets over many months as markets could crash immediately after one makes a big investment.
- Many a time one notices a stock continuously rising in price and is tempted to make the purchase .Unfortunately one lands up picking up the stock at its peak price. The stock may then go on a downward spiral and one may have to wait many years before it regains its value. Always check the 52 week moving average of the stock before a purchase.
- One needs to check the volume of shares being traded of a particular Company before purchasing them. Huge volumes on the stock signify a high interest in the Company and a decreasing volume signifies a loss of interest in the share and the Company. If the stock price rises but volumes traded on the stock fall drastically it indicates that interest on the stock is on a wane.
The contrarian streak
- There is a famous saying by Warren Buffett “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
- Stock markets are all about color. Stock markets are in the green. What does this mean? There is a general bullish feeling around and one feels like jumping on the bandwagon. Stock markets are in the red. What does this mean? Panic selling ( Blood is running in the streets).If one follows the herd there is no profit to be made in the stock markets. One needs to buy shares of good reputed Companies when everyone is selling as this is mostly a panic sale. One needs to sell when everyone around is buying as a bull run does not last forever .Remember “ Make hay when the sun shines”.
Buy and Hold
One has just bought shares of a reputed blue chip Company and its price has crashed due to Macro economic factors beyond the control of the Company.
- The dollar has gained against the rupee due to an increasing CAD (Current account deficit ) and a general listless economy .People all around are selling shares of reputed blue chip Companies. Should one also do the same?
- Stocks of well reputed Companies eventually regain in value and give good returns over time. If one sells too quickly he suffers a loss due to sheer impatience. Always back the winning horse no matter how long it takes to win.
- One has invested in the market and picked up good blue chip stocks and within a few weeks their price shoots up. Should one sell and book a profit? If one keeps buying and selling every time a stock rises in price he forfeits a long term gain. Give your investments time. If one does not do so then the only person who profits is the stock broker who pockets huge commissions on the buy/sell transactions.
Build a Portfolio
- A portfolio is a collection of stocks of Companies in different sectors providing a diversification benefit.” Never put all your eggs in one basket”. Diversification namely investing in Companies of different sectors gives a measure of protection to one’s portfolio.
- Shares of reputed blue stock Companies may be very costly. One might have to accumulate these costly shares little by little and build up a strong portfolio with time.
- One needs to curb emotion from investments as this is one’s greatest enemy. Separate emotion from investments. Sell shares which do not give a profit over a long stretch of time and invest the proceeds in better stocks which would rise and give one a profit.
Never neglect a portfolio
- Can one simply build a portfolio and leave it for many years without caring to see its progress or take corrective action if necessary? This is akin to leaving a ship adrift in the ocean without making a course correction when required.
- One needs to track and follow the portfolio at least once in a few months, take corrective action whenever necessary, Get rid of the excess baggage and invest more funds in stocks which are giving a good profit.
- One must never over diversify his shares. One needs to keep faith in the few good stocks even if they are less in number. It helps to pay attention to detail when one has to manage only a few good stocks.