Greetings of the day to all the members of CCI Family.
I didn’t expect that I will get such a good response within a day. I have answered all the emails for the previous part.
The link to the previous 2 parts are given as under -
“Journey into stock market - Basics”
“Journey into stock market - Part 2”
In this article I will be focusing on the following points:
- Tips (Additional i.e. Other than mentioned in second part) for investing in stock market
- Other factors affecting stock market
Before reading this article please complete the first two parts for better understanding.
So let’s start with it –
Introduction -
If one has the money and drive to grow their income, the stock market is one of the top of mind options for many investors.
Of course there are some who prefer keeping it safe with Fixed Deposits and Life Insurance, and get fixed returns.
But there are many out there who believe it's worth taking the risk of investing in stocks because of the high intensity returns it can yield.
Choose the Right Broker –
a. Firstly, start with a broker with who charges reasonable brokerage. You can always go for the one that offers the lowest brokerage, provided there are no hidden costs involved.
b. A listed broker will be a safer option for you, as it will be in the close scan of the regulators.
Create a Portfolio –
a. Avoid concentrating all your money in a single stock. Try and diversify across stocks by capitalization (small, mid, and large caps), sectors, and geography.
b. This is mainly because not all categories fluctuate at the same time. So, if you happen to lose out one particular stock, you can recover it from the safer and reliable stocks and bonds.
Timing –
a. Time and time again, investors take profits by selling their appreciated investments, but they hold onto stocks that have declined in the hope of a rebound.
b. If an investor doesn’t know when it’s time to let go, he or she can see the stock sink to almost worthless.
c. Let us understand the above with the help of an example: Suppose Mr. x holds 100 shares of TCS @ 1000 (Date 1.01.2014)
d. Now on 2.01.2014 SEXSEX rises by 1% so as TCS by 2%. So share of TCS on 2.01.2014 is 1020. On 10.01.2014 it rose to 1050.
e. Mr x sold his investment at 1050 and enjoyed profit of Rs. 50,000.
f. Now let’s see it from another angle if the price of the share fell to Rs. 990 on 2 nd and further to 950 on 10.01.2014.
g. Now Mr. x plans not to see share in the hope of a rebound.
h. This is the biggest mistake committed by many retail investors. If I was the consultant of Mr. x I would have suggested him the following –
i. Firstly purchase share by putting a stop loss at Rs. 990. So as to restrict the possibility of loss to Rs. 1000.
ii. Even if he didn’t put stop loss, I would have suggested him to sell the share as soon as it fell beyond 990.
iii. The main reason of selling it is so as to restrict our loss at 990. We don’t know how bad it will go in future.
iv. Now after selling (And after applying the concept of Resistance and support) I would have suggested Mr x to buy again at 950 on 10.01.2014.
v. Now we know that share has seen his worst level so it will definitely increase.
i. So what we learn from above is if the share is rising, don’t sell it too early and on the other hand if it is falling try to move out of the Sauda so as to restrict your loss.
j. I have explained the following two theories with the help of the example.
Please have a look –
Riding a Winner - Peter Lynch was famous for talking about "tenbaggers", or investments that increased tenfold in value. The theory is that much of his overall success was due to a small number of stocks in his portfolio that returned big. If you have a personal policy to sell after a stock has increased by a certain multiple - say three, for instance - you may never fully ride out a winner. No one in the history of investing with a "sell-after-I-have-tripled-my-money" mentality has ever had a tenbagger. Don't underestimate a stock that is performing well by sticking to some rigid personal rule - if you don't have a good understanding of the potential of your investments, your personal rules may end up being arbitrary and too limiting. (For more insight, see Pick Stocks Like Peter Lynch.)
Selling a Loser - There is no guarantee that a stock will bounce back after a protracted decline. While it's important not to underestimate good stocks, it's equally important to be realistic about investments that are performing badly. Recognizing your losers is hard because it's also an acknowledgment of your mistake. But it's important to be honest when you realize that a stock is not performing as well as you expected it to. Don't be afraid to swallow your pride and move on before your losses become even greater
Other Factors -
- Never trade without a stop loss
- Stop loss should not be more than 3% of capital
- The best stocks to trade are stocks which gives a all time high breakout.
This would bring an end to my article. I hope thorough it many of you will benefit.
In my next article I would be discussing some more important points for investing.
About the Writer –
CA Final Student (Gave Nov 14)
CIMA Management Level
B.Com (P)
# Any sought of queries or suggestions for the remaining parts are most welcome. Feel free to contact me at sanyam.arora27@gmail.com
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