Being a Stock Investor sounds cool and fashionable for beginners. A typical beginner stock investor is in early 20’s fresh out of college. Disposable income is high and on top of it, there is a strong urge to multiply the money. Greed is the biggest PULL factor towards stock market. I discussed greed and fear in detail in my post, Successful Investors – 5 Hidden Secrets to Make Money. In my opinion, Out of 100 so called investors, 80 are Stock Traders and only 20 are Stock Investor in the true sense. The objective of a stock trader is short term investment, book profit, and exit. I am not including Mutual Fund investors in this.
The second pull factor to the stock market is friends and peer pressure. Circa 2004, i remember discussions of my colleagues on how they double or triple their money in few months. Trust me most of these were peppy or loose talks. I wish i could have ignored those discussions during my early years of stock investment.
If you are new to stock market then it is important for you to understand this game. If you understand then take a plunge else exit. Normally, financial planners suggest beginners start with mutual fund investments. Direct equity exposure is too risky. Some investors follow their advice and others are willing to take bigger risks. Therefore, if you are all set to become stock investor then i have compiled the list of 11 Golden Rules based on my personal experience
Stock Investor – 11 Golden Rules For Beginners in Stock Market
1. Test the Waters:
Before direct equity exposure, it is always advisable to test the waters. Now you must be wondering how to do that. The answer is very simple, there are hundreds of free portfolio managers available on the web. You can register a free account with one of the portfolio managers. Create a dummy portfolio of stocks you would like to invest based on your research. Invest the dummy amount you would have invested in reality.
Now as a stock investor start monitoring your dummy portfolio say for a month or 3 months. You will get a flair of the stock market and its volatility. Before actual investment, your objective should be to create a profitable dummy stock portfolio as a stock investor.
2. Start reading Business Newspapers:
Stock Market Investment becomes gamble if you are firing in the dark. It is absolutely necessary to keep abreast with the latest happenings around you. For example, immediately after Brexit, i shared a post, Brexit – How it will impact your personal finance in the long term. In that post, i mentioned that the outlook for IT shares is bleak after Brexit. After one month, most of the IT shares have lost more than 10% stock value and slide will continue. I am not saying that i am always right but a strike rate of 80% is good enough.
To achieve 80% strike rate, you should read some of the quality business newspapers (free of paid news). Moreover, as i always share that i trust foreign media more than the desi one. Besides Indian business news, you should be aware of what is happening around the world. The international events also have a deep impact on Indian Stock market.
3. First Stock Purchase:
Your first stock should always be from the sector you are most familiar with. For example, if i am working in banking sector then in all probability my knowledge about banking sector must be more compared to the other sectors. Always remember that if any sector is not performing well then it does not mean that there is all round beating for the sector. You will always find some quality stocks. For example among all banking stocks, i find HDFC Bank, Kotak Mahindra Bank and Indusind Bank stocks as quality stocks based on my personal research. Therefore as a stock investor, your first stock/s should be from the sector you are most familiar with or tracking on a regular basis.
4. Invest from Profit booked/Income generated:
As a beginner stock investor, your initial stock investment should not be from the salary or other income. You should invest from the profit booked/income generated. The reason being even if you lose the money, you will not regret. In my case, as a stock investor, my first investment was from the interest of fixed deposits and profit booked from gold.
At the same time don’t invest a huge sum in one shot. Divide the amount to be invested in 10 Equal Installments and link the investments to key milestones. For example, for every 5% increase in portfolio value, i will invest 10% in top 3 performing stocks. The example is just a reference, you can set your own rules depending on risk appetite.
Though no one can time the stock market but one of the tried and tested methods is to check the following ratios
(a) P/E Ratio
(b) P/B Ratio
(c) Dividend Yield
I covered all these ratios in detail in my post, Stock Investment – When to Enter and Exit the Stock Market. These ratios help to decide when to enter and when to exit. If the first experience is BAD then it creates lifelong Fear in the mind of the stock investor. Therefore, the objective is to make the first experience a memorable one in true sense :).
6. Never listen to your friends/family/stock gurus and do your own research:
Recently i met one of my vendors. We were casually discussing the stock market investment. He told me that he has invested in five stocks. I asked him the reason for the same. The reason was quite weird. Out of 5 stocks, two he purchased based on his friend’s recommendation and rest three based on his father’s recommendation. As a stock investor, his father made good money on these stocks.
Always remember, the past is history. Every business goes through a cycle. In my personal opinion, all the 5 stocks bought by him are irrelevant today. The sectors shortlisted by him are not expected to do well because of various reasons. Therefore, it is advisable to conduct own research based on an assessment of the current economic situation.
7. Don’t diversify too much
To start with you can buy 3-4 good quality stocks. One of my known stock investors has 76 stocks in his stock portfolio. More than 10 stocks mean portfolio is as good as mutual fund and it’s better to invest in mutual funds. You can beat the return of mutual funds and the index by investing in few good quality stocks.
Alternatively, you can invest in NIFTY ETF.
8. Stock Market is NOT a MONEY MAKING Machine
As a stock investor, we always want to double or triple our investment in a year or two. If you are entering the stock market with this expectation then it is not a place for you. You will be gambling with your money until unless you are the luckiest lot. As a stock investor, you should set your expectations right before taking a plunge. In my opinion, your expectation should not be more than 10% to 12% annual returns in the long run. Here i am assuming you are not a trader.
9. Retail Investor is a very small fish in Big Pond
To understand how stock market operate you should understand “The role of a Market Maker in a Stock Market”. The market maker is the GOD of the stock market. He may decide the direction of the market. All your analysis and research will go for a toss if the market maker decides against the stocks shortlisted by you. Even though the stocks shortlisted by you are quality stocks.
In other words, as a stock investor, you have to align your investment strategy with the market maker and FII’s. Your returns will be directly proportional to the fact how well you are aligned with the market maker and FII’s. As a retail stock investor, it is very difficult to find out but not impossible. You need to catch the clues and conclude. It’s an art and successful stock investor knows it well.
10. Invest Rationally:
Most of the stock investments are driven by emotions, greed, and fear. It is one of the major reasons to lose money in stock market. One of the examples is to buy stock based on news or speculation without sound logic. In 2014 there was great hype created around the revival of PSU’s and PSU stocks were labeled as future multibaggers. What happened after that you can check yourself.
11. Experience Counts and makes you wise:
The best teacher in personal finance space/stock market is an experience. No one can teach your art of investment except your experience. You should learn from past mistakes and try to avoid them in future. Gradually, it will make you wiser and your strike rate will improve. Therefore, as a stock investor, you should learn from your trading experience.
Words of Wisdom:
Always remember a famous proverb that you should not eat more than you can digest. In my opinion, this is one of the golden rules for stock market investment also. Though i am not sounding pessimistic but as a stock investor, you should invest only what you can afford to lose.
Lastly, you should EXIT if you feel stock investment not your cup of tea. Don’t go by motivational and inspirational quotes of stock gurus. Recently, i read one such quote “Abki Baar Sensex Pachaas Hazaar”. It means, this time, Sensex will cross 50,000. Always remember that stock market is a zero-sum game as i keep highlighting in my posts. Someone’s Loss is My Gain and vice versa. Therefore, going by this logic if the market has gained 20% then it does not imply that each and every stock investor gained 20%. Some stock investors have lost 20%. As a stock investor, you should hold your foot on the ground. At the end of the day, it is your hard earned money.
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