There is no assured route for achieving investment success, nor for that matter is there any cut-and-dried, instantly applicable, sure-shot formula for making money in the stock market. There are no high-flying stock market geniuses or financial wizards either. Leaving aside the lucky few who make pots of money within a short span of time, for most other people investing in the stock market is just like any other business. It take times, patience, hard work and perseverance to achieve success. However, there is one redeeming feature about stock market investments that singles them out for favorable attention. Over the next ten to twenty years, the Indian capital and stock markets are going to offer some of the best and most lucrative opportunities to make big money compared to most other investment avenues. This collection of tips has been given with a view to help you take advantage of these opportunities.
Do not invest in unlisted shares
This is the first basic principle for profitable stock market investment.
Invest in active shares
Invest only in shares that are traded frequently on the stock exchange, preferably at least 3-4 times a week. Give preferance to shares that are traded regularly on more than one stock exchange.
Diversify your investments
Do not put all your money into shares of any one company or industry-spread it over ten or twenty companies. Diversification minimizes risks, lends stability to your profitable and ensures safety of capital.
Excess diversification, for example, portfolio of shares of 80 to 90 companies, puts a limit on high returns without commensurate compensation in the form of added safety. Over-diversification is nothing more or less than average investing for average returns. Shares in, say ten companies engaged in eight to ten different industries generally provide sufficient diversification.
Ensure Liquidity of your investment
A liquid investment is one which can be easily sold. Buy only liquid shares, not shares which you may later have difficulty in selling. In other words, do not block your money by purchasing shares for which you may not be able to find ready buyers when you want to sell them.
In all investments there is a trade-off between reward and risk
High-returns investments usually carry high risk, whereas low return investments carry lower risks. Try to strike a balance between reward and risk while making your investment selection.
Investment risks can be reduced through knowledge and experience.
Calculated investment decisions carry lower risks than blind, impulsive decisions taken without adequate information and analysis. Experience and knowledge minimize exposure to investment risk. Therefore, keep yourself well informed, do your investment homework and get competent and informed investment advice before you take a buy or sell decision.
Understanding the stock markets
The stock markets always over-react. They over-react both when they rise and when they fall. This is a basic truth applicable to stock markets all over the world. Over reaction is what gives to booms and depressions. In a bull or rising market, share prices shoot past their intrinsic values to reach dizzy heights; whereas in a bear or falling market, they plummet to depths far below their intrinsic worth. These overreactions provide opportunities to intelligent investors for making money.
Stock market prices never go straight up or straight down
They always move in short up and down spurts, i.e. in a zigzag pattern. Every rise is followed by a fall, called a reaction-and every fall is followed by a rise which is called a rally. You should make use of this universally observed stock market behaviour for timing your buy and sell decisions.
Greed and fear are the two most dominant emotions that influence stock market behavior
Greed is the dominant, all-pervasive emotion that fuels a boom, whereas fear eclipse all other emotions in a falling market. Greed and fear are what lead to stock market over-reaction.
The stock markets are irrational in the short-run, but rational over the long-term
Day-to-day, week-to-week share price movements are governed by rumours, gossip, tips, misinformation, crowd behaviour, mass psychology and knee-jerk reactions to news headlines and breaking news. This is the main reason why it is so difficult to understand, interpret and predict short-term share price movements. In the long-term (generally over one year) on the other hand, the price of a share tends to converge towards its intrinsic value. In other words, over the long term violent price fluctuations tend to get flattened out, thus enabling price and value to match. Therefore, it is always advisable to bank on the underlying long-term trends while making your investment decisions, and not focus on erratic short-term price fluctuations.