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5 Golden Rules of Stock Market Investment

Stock Market Investment
Stock Market Investment

Stock Market Investment is both easy and challenging. If you know the rules of the game, then Stock Market Investment is a cakewalk. Let me admit that only smart investors can make money in the Stock Market. At the same time, no one is born smart investor. Investors learn from their mistakes and graduate to smart investor. I like TV program Wizards of Dalal Street on CNBC TV18. The finest minds of the Dalal Street share their experience, learning’s and mistakes. Every smart investor has a secret recipe to Make Money on Dalal Street. We can’t expect the market experts or smart investors to reveal their secret formula of Stock Market Investment. At the same time, investors should catch signals/investment style from market experts. An intelligent investor always makes out whether the stock analyst is sharing a genuine tip/suggestion or just bluffing around.

Through my blog, i am trying to share my investment style. I am attempting to master in low risk and high return Stock Market Investment. In my opinion, To minimize risk, an investor should control loss in the stock market. The arena to maximize returns is very vast and open. In my previous post, How to analyze Security Wise Delivery Position?  i shared one such imp analysis from my kitty. I will share more such learning in future. This post is dedicated to 5 Golden Rules which i strictly follow for my Stock Market Investment. According to me, The two critical success factors in Stock Market are Discipline and Patience. In past, i incurred huge losses because of lack of Discipline and Patience. But i learnt from my mistakes and moved on. The market always rewards investors who learn from their past mistakes. Here i would like to share a small case study that was shared on one of the TV programs. Some time back, one of the employees of Mr. Gautam Adani made a mistake that costed heavily to the company. He went to Mr Adani with his resignation. Mr. Adani rejected his resignation and told him that company paid a price for his (employee’s) learning from the mistake. Mr Adani further added that he don’t want his competition to gain from the learning in his company. He retained the employee. Hats off to Mr. Adani !!!. On my blog, i share my learning’s so that readers learn from my mistakes :).

5 Golden Rules of Stock Market Investment

(a) Never invest more than 10% in a Single Stock:

The fear and greed factor play very imp role in this golden rule. To avoid any future shocks, you should hedge your risk by not putting all eggs in one basket or concentrate stock portfolio. The counter argument to this style of stock market investment is that then it is better to invest in mutual fund. In this regard, stock selection is the critical factor that decides the return of your portfolio. As i explained in my post, Stock Portfolio – Competition among Stocks that your stocks should compete. It will ensure only best stocks in your portfolio. Also, full 10% should not be invested in a single shot. In my future post, i will share how to allocate your capital in the stock market.

(b) Stay away from Stocks with less than 50% Delivery (20 DMA):

If you are a long term investor, then stay away from stocks with less than 50% delivery%. On the other hand, traders should deal in stocks with very low delivery%. The presence of speculators/day traders increases the volatility of a stock. Typically, lower the volatility higher the chances of increase in Stock Price. Though it will also depend on other critical factors of Stock Market Investment. It is very tough for a retail investor to understand the game plan of intra-day trading which is perilous.

(c) Invest in Stocks with more than 5 Lac daily volume (20 DMA):

Many penny stocks or highly leveraged companies fall into this category, but i am not suggesting such shares. You should identify good companies with very high volume. Why i invest in such stocks because it is tough for traders to manipulate high volume stocks. Long-term Stock Market Investment should be in liquid and stable stocks to hedge risk. Obviously there will be some exceptions but the objective is to refrain from Stock Market Investment in low volume stocks or stocks that can be easily manipulated.

(d) Prefer Stocks Traded in Futures and Options:

Not many investors know that only 163 securities are allowed to trade in future contracts. NSE allow future trading in a stock after rigorous checks and filters. Therefore, in my opinion stocks that trades in futures are more stable and reliable compared to others. It does not guarantee that NSE is always right in its selection. Few examples are Amtek Auto, Motherson Sumi, etc. But at the same time reliability factor is still very high, and business environment is dynamic. As i mentioned that learning from past mistakes will make Futures and Options more robust and reliable in future. Another reason for selecting securities traded in future is that you get a lot of futures and options data to analyze. It will help in Predicting Stock Price Movement.

(e) Keep your Stock Portfolio Agile:

Here i would like to explain with an example. This investment strategy is based on famous management lesson. Buffalos always move in a herd to avoid being hunted by the Lion. The lion kills the slowest moving buffalo in a herd. It is good for the overall health of the herd if the weak/slowest Buffalos are killed. It improves the overall speed of the herd in case of hunting. Similarly in the game of Hockey/Football, a coach keep rotating players according to field conditions i.e. replace the weakest link in the field. In Stock Market Investment, You should keep identifying laggards and performers. Kill the laggards and add performers to your stock portfolio. It is important to keep a stop loss to kill the laggards. Never love your stocks as you never know when they will stop loving you.

Words of Wisdom: There is no right or wrong formula for Stock Market Investment. It depends on the understanding of an investor or his/her stock broker. Sometimes, even ace investors went terribly wrong in their judgements. Though i will not name stock, one of the ace investor recently invested in an IT company that delivered poor results. The stock tumbled, and investors lost money. One of the Bollywood mega stars invested in one of the company. The stock zoomed after this news and then tumbled. Therefore, Stock Market Investment should never be news driven or based on recommendations of stock analysts. Always do your analysis and invest once you are convinced about your Stock Market Investment.

Hope you liked the post. Please check the disclaimer on this website. Among all the stocks discussed in this post, i don’t have a position in any of the stocks.

Copyright © Nitin Bhatia. All Rights Reserved.

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