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9 mins read . 14 Nov 2022
If you are a beginner to share market investment, it is very easy to be confused. After all, you are surrounded by well wishers dissuading and share market tips persuading. Amidst this chaos, the one that can really help you in this share market journey is share market knowledge. It is always better to be a well informed investor than being a misinformed investor or a badly informed investor.
One thing to remember is to keep away from share market tips, rumours, WhatsApp forwards etc. Rather focus on the share market basics. Remember share market investment tips can only take you so far. Instead a better way to offer share market tips for beginners is to focus them on the fundamentals and help them to understand the basics of stock market investing a lot better. Here is a tome on share market basics for beginners.
Let us now look at five such interesting tips that can be offered to share market beginners.
Are you a trader or an investor? That is a rather tough question, but in answering that question lies the answer to most of your question. In other words, are willing to commit money to equities for the short term or for the long term. A trader looks at making profits out of stocks in a shorter span of 1 week to a few months. A long term investor, on the other hand, takes a 3-5 years perspective to create genuine wealth in the stock markets. It is not about whether you should be a trader or an investor. Instead it is about being clear whether you want to be a trader or an investor. Here is why.
For instance, if you want to be a trader, you must be clear about what is your trading capital, how much you are willing to lose, how much of risk you can take etc. You cannot buy for a week and then say you can wait for the next few years. On the other hand, if you are an investor take a long term perspective as you can afford to take more risk with a longer waiting period. For beginners, it is always a good idea to start as investors and commit money for the long term than to try being short term traders.
This is what knowledge based investing is all about. Once you are clear about whether you are trader or an investor, the next step is to understand the dynamics of the market. Here you need to learn how to operate your only trading account, when to use market / limit orders, how to put stop loss, how to set profit targets, how to exit the market, when to stop being in the market etc. Before you start investing in stock markets, it is a good idea to have a grasp of the market infrastructure, process flow between your demat account, trading and bank account etc. The other part is about grasping the companies.
Some people protest that they re rookie investors and cannot do research like professional analysts. You don’t have to. Understand the company you are investing, what they are doing, are they making profits, is the company growing, are the ROE and ROCE sufficient etc. You don’t have to become an analyst; just understand the stocks you are getting into. One tip here is to start with your comfort zone. That means; if you are working in the steel or cement industry, start looking at the balance sheets of steel and cement companies. That is the easiest way to start knowledge based investing.
This may look esoteric to start with, but it is straightforward. Obviously, if you are a trader you have shorter profit targets and an investor has longer profit targets. One question people ask is if a stock they buy doubles in a month, what should they do. The answer depends on the kind of stock you are invested in, but here there is a basic rule to remember. If something is too good to be true, then it is probably not true. You make money out of booked profits and not out of book profits. So, it is OK to lose out a bigger profit, as longer as you are still making attractive gains.
The other aspect is risk tolerance. Every investors is limited by some risk tolerance. There is only so much capital that you can commit. Put limits on the number of stocks you will be invested in at any point of time. Define the risk / loss levels on a daily basis, weekly basis, monthly basis and overall basis. When such limits are reached, just stop trading and go back to your drawing board. Above all, it is always advisable to trade stop losses. Even if you are a long term investor, keep a mental picture of the level you will close your position at. You can run your position with rolling stop losses if the stock is moving higher.
This is simple to understand and implement. Spread over more stocks. If you have a corpus of Rs5 lakhs, ensure you at least have 5-6 stocks in your portfolio. That reduces your Stock Trading risk and in the event of sectoral downturn, you don’t see a huge erosion in your investments. This is something you must always apply, even in trading. The other is about avoid the lure of penny stocks. Buying a stock just because it is available at Rs3 is not a good idea. You invest to make profits not to accumulate junk. Not all penny stocks are bad, but a stock that has fallen 75% in the last few months is not cheap, but a falling knife. Beware of these.
Often, this is easier said than done, but you must avoid panicking when markets go against you. When you panic, you subsidize the other trader who does not panic. Also, look at markets from a pragmatic perspective. If the Nifty is down to 10 P/E, it must be a better idea to buy than to sell. Similarly, if Nifty is at 35 P/E, it has to be a better level to sell than to buy.