Investing in stocks is a fun and greedy game.
You go in with an anticipation that the stock will no doubt zoom to a level higher than you bought; you watch in perspiration as the scrip goes up and down; you sweat when your losses begin to mount; you heave a sign of relief when they nudge closer to your buying price and you sell out as soon as they move in positive territory.
I am a die hard fan of mutual funds and take limited exposure to direct stocks. Whenever I do, I keep the following rules for successful stock investing in mind.
1. Why buy ?
Why are you buying the stock ? Is it because your next door neighbour told you about it ? Did it flash across the major TV channels ? Or did your brokerage firm give you a buy call ?
These reasons hold no water and will not benefit you – no one made money without any hard work. If you cannot study the financials of the company yourself or understand the industry the firm belongs to, why buy ?
Be sure about why you have bought the stock so that you can question yourself about its failure and pat yourself on its success.
2. Set a target to sell and run
You must have invested in the stock for a reason and therefore, a target. If you haven’t set yourself a target of when to sell, then a small loss on the stock will make you wait till the price breaks even to your buying price and a small gain will make you greedy enough to wait for it to go up more.
Set a target for yourself and cash out the moment you reach it.
3. Don’t get married to your stock. Only the wife deserves it
When you pick a stock, you hope to make money. On many occasions, the pigeon will choose to poop on you. It’s wiser to cut your losses and invest that money into another stock which can make some money for you than to stay on with your loss making stock.
If you cling on to it, you will no doubt buy more of it at a lower price to average out your purchase price. That is like feeding the pigeon sitting on your head.
4. Know you risk appetite
When you buy a stock you want to make a killing on, go with the assumption that you might lose the entire capital. If you think a good stock cannot erode in capital, think Satyam Computers.
Only if you agree with yourself that your heart will still be pumping blood those 90,000 times a day on complete loss of your money, buy the stock. Lest, stay away. I personally think this is the single most important reason why people lose money in the stock market.
5. You can’t gain all the time
Stock market investing is a game where you cannot make money all the time. No one does. No one will. Be ready to make losses. The more losses you make, the more careful you will be with your money. The more gains you make, the more you will dabble. The more you dabble, the more you gain and lose. And it goes on.
But accept the fact that you will lose money. And if you don’t keep in mind the rest of the rules mentioned here, you will lose lots.
6. The stock market shuts at night.
If you hold positions that are giving you sleepless nights, you have no right to buy into them. There is nothing more worse than going to bed thinking about the short position you could not square off today and at what price it will be squared off tomorrow.
If you are going through this phase, you are into the wrong style of investing. Decide whether this is what will fetch you money and happiness. Keep your stock investing limited to the time the markets are open. If you disagree and want to delve on it during the night, ask your spouse.
7. Don’t be penny wise and pound foolish
If you intend to buy a stock which you think will be a multi-bagger, what sense does it make for you to wait till its price is at the price you want to buy it for ? You should go and grab it even if it is a few rupees more.
Remember, the extra that you pay now will be easily compensated by the stock when it multiplies in value. Being insistent on wanting it at the price you have set for yourself might take the stock away and out of your reach. A few rupees here and there don’t make much of a difference.
Can you think of any more points one needs to keep in mind when investing in stocks ? I am sure there are tons out there…
very funny. I can add another one :
Buy low and sell high.
The world knows it………..Buy lowest and sell highest.
Nice writing. How many stocks do you recommend should we buy ?
@Khalid, Here is my recommendation : https://www.thewealthwisher.com/2010/05/27/how-many-shares-should-you-have-in-your-portfolio/
good reminder of stock investing points. I think the most important thing is tht person buys when stock market is high and sells when it is low, it shoudl be the opposite actually.
@Joshi, Very correct. Most investors flock to the market when it is high because that is when there is a flurry of IPOs and brokerage calls ! SEBI should do something about it.
For me it would be to control Greed. Most investors are greedy and end up getting stuck in a stock. I too was greedy initially when i started investing but over the years learned to control it.
Also did not like your 3rd point
“3. Don’t get married to your stock. Only the wife deserves it.”
I have some stocks which i would like to get married to (hold for lifetime).