The essence of human life is that the old order will automatically exit while the new one will come into existence. This change is constant. Stock market operations are also subject to this phenomenon. It was only in the year 2004, people started investing more on shares. It progressed consistently with more and more new entrants almost till 2008 when the markets witnessed a great fall then. It made the investors realize the fact that it was common for the stock market to fluctuate based on market conditions.
Stock market fluctuations offer practical learning and experience on a daily basis to the investors. The attraction of stock market for the young entrants has been significantly progressing as per statistics, revealed by NSE which says that the no.of investors in stocks and shares among small urban places has now touched 50%. Many investors have learnt the fact that they can invest their funds on stock market for a long-term benefit to beat the increasing rate of inflation which would impact the stock market during the short run.
There are basically ten key factors that are outlined here which would help young players to benefit from their investments in the stock market:-
1.You are also an entrepreneur:-
You know the fact that out of so many types of investments such as Fixed Deposit, Bonds, Gold, Real Estate etc., investment in stock market is the one which is capable of getting you more returns over a period of time. This is like starting business with your own capital. Investing in stock market is like investing in business but this requires practical knowledge like covering fluctuations in the market due to economic and political conditions including other factors and this does involve an element of risk. If you err in this, you are bound to lose your money. Think you are an entrepreneur and start your investment.
2. Priority for Capital:-
Capital is primary. Risk taking ability is equally essential. People who can afford to claim that ‘risk-taking’ is just like ‘rusk-eating’ in life, can only enter stock market operations. At the same time, never borrow funds for interest to invest as in the case of other businesses. In stock market, there are innumerable investors who invested their money left, right and centre and ultimately had become bankrupt. Then, how to invest in stock market?
First Method:- Supposing you assume that you have Rs.2 L to invest in shares. You divide this 2 L into equal parts of 5 or 10 or 12 as per convenience. If you choose 10 parts, you can invest in 10 different stocks at the rate of Rs.20K per scrip.
Second Method:- Instead of equal parts, divide the capital of 2 L in a constant ratio like 5% or 10% or 12%. Supposing you choose to invest 10% of 2 L amounting to 20 K in shares, after this 10% investment, the balance is Rs.1,80,000/-. The next investment will be 10% of Rs. 1,80,000/- which is Rs.18,000/-. The balance will be Rs.1,62,000/-. Next investment will now be 10% of 1,62,000/-which is Rs.16,200-. Balance will be Rs.1,45,800/-. During this time, if you are able to sell a particular share which is on the premium, you may gain a sum of Rs.21,000/-. Adding this with the remaining capital of Rs.1,45,800/-, it will now be Rs.1,66,800/-. Therefore, the next investment will be the same 10% of Rs.1,66,800/- which will be Rs.16,680/-. If we keep our investment pattern in this manner, we will be in control over our funds for effective stock market operations.
3. Do what you know:-
To succeed in business the simple method is to plunge into a business in which one is having good knowledge. This principle is the secret of the world renowned financial wizard, Warren Buffet. Keen aspirants should necessarily know the following fundamental status of the companies before investing:-
In respect of a manufacturing company- who are all its customers?
What is the level of patronage and loyalty of their customers?
Who are all their competitors?
What is their position in the industry?
What is the likely future of this company?
This company’s profit & loss account, balance sheet status
Financial status of the company as published in their quarterly results
In the above-mentioned statements, one can find out the income & expenditure, P & L, value of movable and immovable assets, debts, value of shares held by the promoters etc. Of course, there is a practical difficulty as to how to assess the individual company’s status like this when there are thousands of companies and more in reality. The solution is simple. NIFTY Index contains 50 companies only which alone can be taken up for this analysis as they are very strong companies.
4. A picture is worth a thousand words:-
Visuals are more informative and interesting. It will help us to note the ever changing status of a particular share in the exchange with utmost accuracy. Graphic charts will provide all details regarding the share value fluctuations, the current trend lines, a particular share’s level of support or resistance to changes happening in the exchange etc. There are many sorting software like MetaStock which effectively service this valuable purpose. At the same time, one should understand that this is not a rocket science. Anyone can become familiar to use.
5. Look before you leap:-
Planning is primary and execution is secondary. One should maintain a diary and frame simple rules for self-implementation. One should be clear in his mind as to how much to invest; in which company’s shares to invest; when to sell to avoid loss; when to buy to gain more and when to keep mum and sail with the wind etc. This is your blueprint. As long as this is available and you stick to this, the game will be smooth and romantic; once you lose this diary the life will become rheumatic.
6. Move with the Winds:-
Stock market will provide shelter to those who simply accompany it as per its movement. Those who resist or try to go in counter direction, the stock market will simply divorce you without any mercy.
When the price of the share keeps going up, it denotes an upward trend and vice versa which is called downward trend. During upward trend the demand will be more with less supply meaning more gain for you for the quantity of shares on hand. Similarly, during the downward trend, the demand for your shares will be less with more supply meaning loss for you. The upward trend indicating more demand is bullish in nature while the downward trend indicating more supply with less demand and resultant less gain is a bearish trend. This is a phase where you should study the market with patience. Else, you will face adverse consequences. Sometimes the movement of a particular share will be totally unsteady like a cat on the wall. You should refrain from reacting during this time. You must only watch the game silently.
7. Part with the stock at the appropriate time:-
Stock market is always replete with risk. Hence risk management is but imperative. There are some risk management techniques as below:-
Experts in this stock market operations opine “Never marry a stock”. There is no place for sentiments.
When you start facing downward trend and incurring loss on the shares held by you, you must dispose of immediately without any second thought.
When the value of shares goes down then also, you must be careful. Trying to buy more of that scrip is tantamount to a piercing knife which will harm you very badly.
Similarly, when a particular scrip moves up, you must be wise enough to part with the same at one level. Contentment is a ‘must’. Else, you may burn your fingers.
Stock market nature of operations will keep on giving us enough scope for buying and selling for a gain. Therefore, you ought to be discreet and should have no hesitation to leave it at the time you need to. If you hold on to a particular scrip for any reason whatever, you will be subject to the impact of ‘pull back’.
Finally, if you want to minimise loss and maximise gain on the scrips, you must know when to exit and enter into the market again.
8. Our mind is a monkey:-
When it comes to buying of vegetables, we know how much a kilo brinjal would cost and at what fair price we should buy a different vegetable etc. Whereas when it comes to stock market operations, we will be very much confused as to which scrip to buy or to sell and at what price in order to earn a gain out of that transaction. Our mind being a monkey in terms of inconsistent thinking attitude in general, we will be tempted to shift ourselves from safe market operations to complicated F & O (Future & Options) thereby courting too much of risk. It is, therefore, essential to be in control over our mind.
9. When you become an expert or a ‘system trader’
A step ahead of safe operations principle of buying and selling of scrips with minimum loss and maximum gain is the profile of a systems trader. At this level one will have the blue print on hand; never marry a scrip for a permanent relationship; have full control over one’s mind unlike a monkey etc. and in addition to these, try to possess a few blue chip shares and a credible portfolio with the ability to play both in the short run and long run technically termed as long term investment, swing trade and position trading etc. A system trader can indulge in ‘day trading’ meaning buying and selling or selling and buying on the same day. But the ratio of fund allocation for day trading must be very low.
10. Formal & Informal Chats:-
Last but not the least is the principle of ‘networking’. An open discussion with like-minded counterparts will be very useful. We will come to know each one’s different experiences, EPS, P/E ratios, chart patterns, stop losses, trend of different scrips etc. We must learn the art of filtering the best out of the lot. Ignore half-baked inputs and absorb the full-fledged information.
If you follow these 10 basic guidelines, you will be able to embrace both the bull and the bear with utmost ease and success.
(This article originally appeared in Nanayam Vikatan issue dt 6/10/2013 written by Babu Kothandaraman, Share Market Analyst and now reproduced in English by P S Ramamurthy)