1. Stock market investing may look simple – one has to buy low and sell high. However deciding what to buy and when to buy is where the difficulty lies. So always start with a small amount of money. Once you’ve had a fair idea of things, you can start raising the bar.
2. The stock prices are determined by the interaction between the forces of demand and supply. Where the buyers for a particular stock on any given day outnumber (in terms of volume) the sellers, the stock prices are bound to rise. The reverse happens when sellers outnumber the buyers.
3. Target growing companies with a strong balance sheet. A key metric to watch out for is the amount of debt a company employs in its capital structure. A company with a higher debt to equity ratio than the industry average should be considered a risky investment. Study the cash flow statements of the company over a period of time to determine whether the company is able to cover its debt interest obligations with the amount of cash it generates from its operations.
4. Make it a habit of picking up new concepts every day. Keep yourself updated with what’s happening on the economic front. Follow corporate news and announcements and study industry data carefully. In the stock markets, it’s only the knowledgeable investor who emerges the winner in the long run.
5. Derivative products like futures and options are complex instruments and should be traded only when you have a strong understanding about concepts underlying them.
6. The overall investor sentiment plays a crucial role in determining the direction in which the market moves. If the ‘overall’ investor sentiment is positive, the markets (as a whole) may rise even when the economy is struggling. It is during these phases that the ‘sentiments’ override the ‘fundamentals’ and the markets may seem ‘irrational’. The key during such times is to go with the flow and not fight it. If the investors as a ‘group’ are betting for the markets to rise, you better go ‘long’ as well.
7. Trading and investing are not synonymous – in fact, they mean two completely different things. Investors buy a stock with the intention of holding on it for a substantial period of time before disposing it off at a premium. Investors therefore buy from a long term prospective and are therefore more interested in acquiring fundamentally strong counters. Traders on the other hand, buy and sell frequently in order to capitalize on the short term fluctuations in stock prices. By recognizing which of the two groups you belong to, you are better equipped at making buy and sell decisions.
8. In the stock markets, no one is immune from losses. A loss therefore, should not cause a loss of confidence. Every loss is an opportunity to reflect upon what went wrong. Remember, a loss is learning opportunity gained. But remember, always trade with a stop loss. It helps to minimize losses in case a trade goes against you.