You can invest your money in Fixed Deposit Schemes, Mutual Funds, Provident Fund, Real Estate and many more. But there is one area of investment that many have found most attractive and lucrative. The reason for its popularity is the high return potential that it allows. Of course, we are talking about investing in the stock market.
Many would agree that the stock market is a multidimensional giant. There are so many factors affecting the stock market that it is impossible to predict how it will behave, whether the stock price will go up or down. If one is not careful, the allure of the stock market can lead to huge losses.
However, a properly disciplined approach to investing in the stock market can work wonders for an investor. Therefore, it is very important to keep in mind the rules of buying shares while investing in the stock market. Read on to know 11 golden share buying rules of investing that can ease your share market experience.
- 1 Rules for buying shares
- 1.1 1. Focus on the Long Term
- 1.2 2. Do Your Homework
- 1.3 3. Don’t try to time the market
- 1.4 4. Buy and sell at the right price
- 1.5 5. Diversify
- 1.6 6. Stay away from tips and rumors
- 1.7 7. Understand the business model of the companies you invest in
- 1.8 8. Don’t make hasty decisions
- 1.9 9. Never take a loan to invest in the stock market
- 1.10 10. Invest small and regular
- 1.11 11. Always monitor your investments
11 golden rules of investing in stock market
1. Focus on the Long Term
Yes, we all have heard of the simple formula of entering the market when it is down and exiting when it is up. Many people use this approach to make some quick profits. They buy shares of a company when they are cheap, and when they feel that the stock price has gone up sufficiently, they start selling the shares at a higher price.
This is very common. But the fact is that such an approach is not so easy to implement, for the simple reason that it is impossible to predict when the stock price will rise, or whether its growth has reached its maximum potential. It is possible that even after selling a particular stock, it may rise further. Therefore, investors actually lose out on further profits because they sell prematurely.
So, instead of thinking of the stock market as a short term money making tool, think of it as a long term investment option. Buy shares keeping long term returns in mind as investing in stock market in long term outperforms other assets.
2. Do Your Homework
Investing blindly in the stock market without proper research or basic understanding of economics is like shooting yourself in the foot. Before investing your money in the stock markets, take some time and effort to understand how the stock market works. Learn about economic trends and factors affecting the stock market. While investing in a particular company, it is essential to do some research on the company’s past performance as well as its future prospects.
The only way to do that is to go through the technical information about the economic performance of that company. Understanding the balance sheet, profit and loss accounts, operating margin, earnings per share and other information will help you understand how a company is performing. If you are new to the world of stock market investing, read online articles that explain how to invest in the stock market for beginners.
Apart from this, it is also important to understand the global effects on the stock market. The stock market is not against world events. On the contrary, politics and news affect the stock market a lot and if one has a good understanding of it, they can predict to an extent how the stock market will behave.
3. Don’t try to time the market
Timing the market means actively buying low and selling high. And ideally this is what any investor wants to do. (After all, this is really the definition of how you profit from a long position.) Consistently getting your market timing right will make you rich. But the problem is that no investor ever gets their market timing right consistently.
One thing that even Warren Buffett doesn’t do is try to time the stock market, although he does have a very strong view on the appropriate price levels for individual stocks. Most investors, however, do the exact opposite, something that financial planners have always been warning them to avoid, and thus end up losing their hard-earned money in the process.
“So, you should never try to time the market. In fact, no one has done this successfully and consistently over multiple businesses or stock market cycles. Catching up and down is a myth. It is till date and will remain so. In fact, in doing so, more people have lost more money than they have made money,” says Anil Chopra, group CEO and director, Bajaj Capital.
4. Buy and sell at the right price
It is very important to buy stocks at prices that you are comfortable paying. You may find some stocks that are very popular and all your peers are buying some, only their prices are something that you cannot fit into your investment budget. Leave them When you are not comfortable, you cannot buy the stocks that everyone else is buying. Wait for something better to come your way.
Also, when you feel that you want to sell your stock and you are getting good returns, do so. It may be counter-intuitive to wait for the price to move up some more. This will help you in taking quick decisions when it comes to buying or selling shares.
Diversification of your portfolio is an age-old strategy for investing in the stock market. It simply means that we should never put all our eggs in one basket. Investing in just one company or one sector is never a good idea, because if the company doesn’t perform well, your investment may lose value. Hence, it is always beneficial to invest in a diversified portfolio to balance your investments.
Generally, it is advisable to invest in a combination of small, mid and large cap stocks. Small and mid-cap stocks have the most potential for growth and great returns, but there are certain risks associated with them. And large cap stocks are mostly stable with acceptable returns. Therefore, a combination of all three will allow you to invest in stability as well as growth at the same time. Diversification is one thing that can help you combat the volatility of the stock market.
6. Stay away from tips and rumors
Investing in the stock market brings with it raucous market tips and rumors from all over. Your friends and colleagues will make suggestions to buy or sell particular stocks. But many of these are just rumours. One of the most important rules of buying golden shares of investing is to stay away from them as they can all be fake. Pay more attention to market fundamentals and you will be in a better position to make informed decisions.
7. Understand the business model of the companies you invest in
You should invest your money only in those companies whose business model you clearly understand. Businesses with good strategies and clear projections are bound to be financially sound in the long run. Do not invest your money in a business whose strategy is difficult for you to understand.
8. Don’t make hasty decisions
Sudden fluctuations and unpredictability in the stock market can be a cause of great stress. So, if you find that your stock has suddenly fallen, don’t rush to sell it. Take a deep breath and sit back. If the economic fundamentals of the company are strong, then the stock is likely to rise again. The same is true when buying stocks. Don’t be in a rush to buy a stock just because everyone else is buying it and advising you to do the same. Herd mentality is quite prevalent in stock market trading and it is best to make your own informed decision.
9. Never take a loan to invest in the stock market
Investing in the stock market largely depends on how long you can hold the stock. If you borrow money to invest, you are bound to be short on time when it comes to repaying the loan. Always invest your surplus money in the stock market, money that you know you do not need immediately. In this way, you maximize your stock withholding capacity till the right time.
10. Invest small and regular
When it comes to investing in the stock market, it is better to invest small amounts at regular intervals rather than a huge amount at one go. Besides being cheaper, smaller investments will also allow you to be flexible with your investments.
11. Always monitor your investments
Stock market investing is never about investing once and forgetting about it. This may be true for something like fixed deposits, but not for the stock market. Since the stock market is highly volatile, stock prices tend to change along with changes in the company. Hence, it is very important to monitor your investment portfolio timely to know whether you should drop some stocks which you feel are not performing well.
The above share buying rules will definitely help you to understand how to invest in share market in India. You will come across many individuals who will give tips, claim to have a formula and offer guaranteed returns. Just walk away and focus on the basics.
Once you understand the basic rules of investing in stocks, you can have more control over it. Yet another important cog in the stock market machinery is discipline. Random investments without the backing of research have resulted in the downfall of many. Practice extreme discipline, patience, and consistency, and then you can reap the rewards.
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Thank you for taking the time. have a nice day!