Share market investment is seen as an extremely lucrative avenue for investment, and generating wealth in the long run. Historically, the vast majority of the Indian population has shied away from investing in the stock market, fearing volatility, and in turn, losses.
However, with the rapid growth of technology in the last couple of years, and of course, with amazing online investment platforms like Goodwill, investment in stock market online is becoming more lucrative.
We're seeing a huge number of new users signing up everyday, and realize that there is still hesitation when it comes to investing their money and working towards achieving their financial goal. We've come to understand the necessity for some solid advice when it comes to buying, selling and holding stocks in India.
In an effort to ensure you build towards your financial dream, and not give in to uncertainties and fears festered on by bad advice, we're providing you with 20 of the best tips that we wish we had when we began our investment/trading journey.
Top 10 Advice on Buying Stock in India
Sell a Loser
It is essential that you stay realistic about your investments - there is literally no guarantee that once a stock goes to a period of protracted decline, that it will rebound. Though it might have an adverse psychological impact, acknowledging the losses, and moving on is the best thing you can do for your investments. There is no shame in accepting that a mistake has been made, as long as you ensure that you don't fall trap to the same mistakes again.
Don't Sweat the Small Stuff
If you're an investor, stop focusing on small term price movements, and look at the big picture. As Warren Buffet quoted, purchase only the stocks that you'd be comfortable holding, even If the stock market is closed for the next 10 years. Do not panic over the short term volatility, and do not sell the stock, unless there is a major fundamental change in the company that you don't agree with. Have confidence In the long term growth trajectory of the company that you bought into, instead of the short term falls in prices and paper losses.
Do not overemphasize the few rupee difference you may save from using, say a limit order, as opposed to a market order. The active traders who have years of expertise and knowledge struggle to consistently grasp the opportunities presented in the short term price movements.
Don't Chase a Hot Tip
Stock tips are not for investors - especially ones with a moderate risk appetite. All our regular tips are for intraday trading purposes only, as there is no way to predict how a stock will move over a certain period of time. Even if we come up and give you a stock tip, don't accept it at face value. Conduct your own research and analysis about the investment, before putting your hard earned money to work.
Long term investment success depends on the deepest of research that you must be ready to invest.
Pick a Strategy and Stick With It
Even the great Warren Buffet stuck to his guns, and invested only based on his value-oriented strategy. Because of this, he was able to successfully navigate the dotcom bubble, and the major losses that went along with it.
Don't Overemphasize the P/E Ratio
Investors often place great importance on price-earnings ratios, but placing too much emphasis on a single metric is ill-advised. P/E ratios are best used in conjunction with other analytical processes.
Therefore a low P/E ratio doesn't necessarily mean a security is undervalued, nor does a high P/E ratio necessarily mean a company is overvalued.
Focus on the Future and Keep a Long-Term Perspective
Investing requires making informed decisions based on things that have yet to happen. Past data can indicate things to come, but it’s never guaranteed.
In his 1989 book "One Up on Wall Street" Peter Lynch stated: "If I'd bothered to ask myself, 'How can this stock possibly go higher?' I would never have bought Subaru after it already had gone up twentyfold. But I checked the fundamentals, realized that Subaru was still cheap, bought the stock, and made sevenfold after that."2 It’s important to invest based on future potential versus past performance.
While large short-term profits can often entice market neophytes, long-term investing is essential to greater success. And while active trading short-term trading can make money, this involves greater risk than buy-and-hold strategies.
Be Open-Minded
Many great companies are household names, but many good investments lack brand awareness. Furthermore, thousands of smaller companies have the potential to become the blue-chip names of tomorrow. In fact, small-cap stocks have historically shown greater returns than their large-cap counterparts.
From 1926 to 2017, small-cap stocks in the U.S. returned an average of 12.1% while the Standard & Poor's 500 Index (S&P 500) returned 10.2%.3
This is not to suggest that you should devote your entire portfolio to small-cap stocks. But there are many great companies beyond those in the Dow Jones Industrial Average (DJIA).
Resist the Lure of Penny Stocks
Some mistakenly believe there’s less to lose with low-priced stocks. But whether a $5 stock plunges to $0, or a $75 stock does the same, you've lost 100% of your initial investment, so both stocks carry similar downside risk.
In fact, penny stocks are likely riskier than higher-priced stocks, because they tend to be less regulated and often see much more volatility.
Be Concerned About Taxes but Don't Worry
Putting taxes above all else can cause investors to make misguided decisions. While tax implications are important, they are secondary to investing and securely growing your money.
While you should strive to minimize tax liability, achieving high returns is the primary goal.
Top 10 tips for Selling Stocks in India
Always Use a Trading Plan
A trading plan is a written set of rules that specifies a trader's entry, exit, and money management criteria for every purchase.
With today's technology, it is easy to test a trading idea before risking real money. Known as backtesting, this practice allows you to apply your trading idea using historical data and determine if it is viable. Once a plan has been developed and backtesting shows good results, the plan can be used in real trading.
Sometimes your trading plan won't work. Bail out of it and start over.
The key here is to stick to the plan. Taking trades outside of the trading plan, even if they turn out to be winners, is considered poor strategy.
Treat Trading Like a Business
To be successful, you must approach trading as a full- or part-time business, not as a hobby or a job.
If it's approached as a hobby, there is no real commitment to learning. If it's a job, it can be frustrating because there is no regular paycheck.
Trading is a business and incurs expenses, losses, taxes, uncertainty, stress, and risk. As a trader, you are essentially a small business owner and you must research and strategize to maximize your business's potential.
Use Technology to Your Advantage
Trading is a competitive business. It's safe to assume that the person sitting on the other side of a trade is taking full advantage of all of the available technology.
Charting platforms give traders an infinite variety of ways to view and analyze the markets. Backtesting an idea using historical data prevents costly missteps. Getting market updates via smartphone allows us to monitor trades anywhere. Technology that we take for granted, like a high-speed internet connection, can greatly increase trading performance.
Using technology to your advantage, and keeping current with new products, can be fun and rewarding in trading.
Protect Your Trading Capital
Saving enough money to fund a trading account takes a great deal of time and effort. It can be even more difficult if you have to do it twice.
It is important to note that protecting your trading capital is not synonymous with never experiencing a losing trade. All traders have losing trades. Protecting capital entails not taking unnecessary risks and doing everything you can to preserve your trading business.
Become a Student of the Markets
Think of it as continuing education. Traders need to remain focused on learning more each day. It is important to remember that understanding the markets, and all of their intricacies, is an ongoing, lifelong process.
Hard research allows traders to understand the facts, like what the different economic reports mean. Focus and observation allow traders to sharpen their instincts and learn the nuances.
World politics, news events, economic trends—even the weather—all have an impact on the markets. The market environment is dynamic. The more traders understand the past and current markets, the better prepared they are to face the future.
Risk Only What You Can Afford to Lose
Before you start using real cash, make sure that all of the money in that trading account is truly expendable. If it's not, the trader should keep saving until it is.
Money in a trading account should not be allocated for the kids' college tuition or paying the mortgage. Traders must never allow themselves to think they are simply borrowing money from these other important obligations.
Losing money is traumatic enough. It is even more so if it is capital that should have never been risked in the first place.
Develop a Methodology Based on Facts
Taking the time to develop a sound trading methodology is worth the effort. It may be tempting to believe in the "so easy it's like printing money" trading scams that are prevalent on the internet. But facts, not emotions or hope, should be the inspiration behind developing a trading plan.
Traders who are not in a hurry to learn typically have an easier time sifting through all of the information available on the internet. Consider this: if you were to start a new career, more than likely you would need to study at a college or university for at least a year or two before you were qualified to even apply for a position in the new field. Learning how to trade demands at least the same amount of time and fact-driven research and study.
Always Use a Stop Loss
A stop loss is a predetermined amount of risk that a trader is willing to accept with each trade. The stop loss can be a dollar amount or percentage, but either way, it limits the trader's exposure during a trade. Using a stop loss can take some of the stress out of trading since we know that we will only lose X amount on any given trade.
Not having a stop loss is bad practice, even if it leads to a winning trade. Exiting with a stop loss, and therefore having a losing trade, is still good trading if it falls within the trading plan's rules.
The ideal is to exit all trades with a profit, but that is not realistic. Using a protective stop loss helps ensure that losses and risks are limited.
Know When to Stop Trading
There are two reasons to stop trading: an ineffective trading plan, and an ineffective trader.
An ineffective trading plan shows much greater losses than were anticipated in historical testing. That happens. Markets may have changed, or volatility may have lessened. For whatever reason, the trading plan simply is not performing as expected.
Stay unemotional and businesslike. It's time to reevaluate the trading plan and make a few changes or to start over with a new trading plan.
An unsuccessful trading plan is a problem that needs to be solved. It is not necessarily the end of the trading business.
An ineffective trader is one who makes a trading plan but is unable to follow it. External stress, poor habits, and lack of physical activity can all contribute to this problem. A trader who is not in peak condition for trading should consider taking a break. After any difficulties and challenges have been dealt with, the trader can return to business.
Keep Trading in Perspective
Stay focused on the big picture when trading. A losing trade should not surprise us; It's a part of trading. A winning trade is just one step along the path to a profitable business. It is the cumulative profits that make a difference.
Once a trader accepts wins and losses as part of the business, emotions will have less of an effect on trading performance. That is not to say that we cannot be excited about a particularly fruitful trade, but we must keep in mind that a losing trade is never far off.
Setting realistic goals is an essential part of keeping trading in perspective. Your business should earn a reasonable return in a reasonable amount of time. If you expect to be a multi-millionaire by Tuesday, you're setting yourself up for failure.
