Do’s And Don’ts of Investing In The Stock Market!

The stock market is a field open to all, but all may not remain in profit, in a sustained manner. For disciplined players, it offers a lot of excitement, bouquets and glory, but for the impatient and greedy, who step in for a quick buck, the stock market might prove to be a bed of thorns. Nonetheless, equity investing is a proven way of wealth creation for informed and disciplined investors. Traders and speculators may not always win, but long-term investors, big or small, hardly lose! For success in the stock market, the following dos and don’ts may prove to be path-breakers. 

Do: 

1. To begin with, gather some basic information and knowledge about stocks and the stock market. 

2. Observe, wait and watch. Start with a dummy portfolio by picking up 4-5 stocks. This will give you some insight into market behaviour and help develop confidence and conviction.  

3. Start with investments in mutual funds in a slow and steady manner. 

4. Initially, invest in a staggered manner in smaller lots, with systematic investment plans (SIPs). 

5. Set your own realistic and tentative target for the buying and selling price for a stock or mutual fund, from the secondary market. 

6. Keep stop-loss for equities. 

7. Follow this thumb rule: buy when people run to sell, and sell when people run to buy. The best proof of this hypothesis is that people who invested in stocks in the early Covid period, when valuations dipped drastically, have been rewarded the most in 2021. 

8. Book profits occasionally at an opportune time. Profit in the bank is better than profit in books. It is thrilling to see returns on one’s portfolio, but these are notional. Booking profits also minimises the cost of your holding. 

9. Plough back profits to the extent possible. This will help in building your portfolio steadily. 

10. Keep a long-term perspective, for two years or more.  

11. While buying a stock, besides taking into account known parameters like credibility of promoters, the business model etc., consider dividend yield, daily traded volumes and daily deliveries. 

12. Keep traders’ favourite stocks under close watch for stock picking. Often, it proves beneficial. 

Don’t: 

1. Don’t buy a stock guided by a rumour, expert tip, recommendation or some news in air. These may be vested interest behind their origin. But be watchful on real news, information and analysis. Once convinced, take a decision. 

2. A beginner should avoid dealing in derivatives, that is, futures and options. At the face of it, these look lucrative and rewarding, but the risk is far higher and more devastating. These segments of the market require a different skill set.  

3. Don’t believe in words like ‘guarantee’ or ‘assured returns’ by anybody. In the stock market, uncertainty, unpredictability and volatility are not an exception but the rule. 

4. While booking profit in a stock that you have conviction in, don’t sell the total lot; sell partially. 

5. Don’t get married to your holding! Review your holdings as frequently as needed, but at least half-yearly, keeping in view the market environment and emerging trends. 

6. Don’t be greedy. It won’t be possible to always sell at the uppermost price levels. Book profits at a reasonably high price, as per your judgment. It is common for a stock that is touching the upper circuit for a few days to turn back suddenly. In such a situation, go for partial profit booking and re-enter at a favourable point. 

7. Don’t invest with borrowed money. This may prove doubly harmful. 

8. Don’t panic in a negative environment. Unquestionably, the stock markets are driven by sentiment and any negative news may depress the market badly. In such a situation, be watchful and take decisions cautiously as this may be the time for value stock-picking. 

9. Don’t lose heart if you see the price of the equity you have sold, rising steadily. Instead, watch out for a point of re-entry at a favourable price. 

The author is a former employee of the Government of India and has worked in the agriculture sector