There are many basic rules of investment in stock market. Here is a list of most important ones which I have learned over the years through my experience.
1. Would you gamble in a casino without knowing rules of the game? Of course not. Same way never invest without having a basic understanding of the stock market. Stock market never forgives and has no emotions.
2. No one can time the market. Not even the best of analysts whom you may have seen on TV ,magazine or a newspaper. If they could do so they would be rich like anything and wouldn't be trying to earn by giving tips to others.
3. Overconfidence is harmful in all aspects of life. This is true in stock market too. Do not increase your investment if you have had success just once or twice.
4. Do not trade with emotions. Emotional traders lose more than what they earn.
5. Keep in mind that you cannot always be right. But remember that stock market is always right. If you short in bull market or you go long in a bear market then you are most likely to lose money. Easy method is to always follow the market.
6. Do not invest all your money in a single stock, no matter how positive the news is. Diversify your investments. This will reduce risk of heavy losses.
7. NEVER ever take a loan and invest your money in the stock market. An experienced person will never advise you of that.
8. Do not blindly trust any analyst or a trading software. People claim to have best of knowledge about a stock and they advice others to invest in a stock. But actually their earnings are not from investing in that stock but by selling you these advices. These advices can be seen in a magazine, television, stock brokers, research analysts etc. It is always better to do your own proper research. It would not take more than 7 hours in a week to find a good stock to invest.
9. Start booking profits partially when the markets are high. Do not wait for a correction. Partial profit booking means you will keep increasing your cash reserve with the rise in markets. So with lot of cash in hand, when market falls you will have a good amount to invest at low prices.
10. Cut of your losses. Also you must avoid increasing your losses by investing more and more in a falling market. It may come as surprise to most of you but most of the investors hold on to a stock when it's price is falling day after another and later on sell it at huge loss.
11. Buy at low price and sell at higher price. Most of the investors track a stock for few days and buy after its price has already risen a lot ( Overbought ). Later on they either sell at a loss are get stuck in a stock for a long time.
12. Huge sums of money have not been made by trading daily but by investing for a long term. Look for long term trends of the market and a company. Returns of 20-50 times or even more can be earned if you invest in a multibagger stock for a long term.
Read: How To Identify A Multibagger Stock ?
13. When markets are rising everyone seems to be bullish and when markets fall all become bearish. Best of traders are the one who don't follow others but instead look for signs of trend reversal. Imagine how much money you would have made if you would have predicted SENSEX to rise from 8000 levels in 2009.
14. Do not chase a stock. Keep cash ready and wait for the right price or invest in some other stocks. Your wait might be a long one but remember " everything comes to him who waits ".
15. Do not invest in Futures & Options without having good understanding of it or else it might be your last trade.
Read - What Is The Difference Between Stocks And Futures ?
16. Over-indulgence must be avoided. There are too many experts in the market ( television, magazine, analysts, brokers etc. ), it is advisable to think before you act. Do not keep changing your portfolio on the basis of these recommendations. Again I would recommend you to carry out your own research before taking any action.
17. Remember that two forces that drive the market are fear and greed. When market was at 21K levels everyone seemed to be bullish. Reports were that SENSEX would soon touch 25K levels. People who could not control their greed bought more and more anticipating huge profits. Later on when SENSEX fell to 17K levels in two days, these people found themselves under huge loss. Same way when SENSEX was below 8K levels there was so much fear in the market that people did not consider it as good investment opportunity. Most of them wanted to wait for the SENSEX to fall to 6.5K levels. Unfortunately they never saw those figures and missed a golden opportunity of investing.
18. Most often stock market moves before the news is out. By the time everyone comes to know about the news, the stock price may already have moved. So if you wait to invest till the news is out you may miss the train.
19. Just like in any other field a good trader must have two qualities- commitment and discipline. People who trade in the stock market just on the basis of their luck are mostly losers.
20. Don't go for penny stocks. Certain unheard stocks rise by 20-50 % in just 2-3 days. This makes many traders to jump into that stock. However, most of the times the prices of these stocks jump on the basis of rumors and later fall more than by 20-50 %. In every bull run certain penny stocks outperforms the SENSEX or NIFTY and they are considered a hot pick by most of the traders. But when market falls these stocks are worst hit. These are the kind of stocks that can ruin all your investments.
Read: 10 Mistakes That Causes You To Lose Money In Stock Market
21. Be very cautious when you notice that only one trend is visible. Stock market is not uni-directional. If it is going in only one direction then there are lot of chances of a sudden trend reversal.
22. Avoid opening an account in a small local broking firm. In Jan. 2008 market fell from 21 K levels to 17 K levels just in two days. At that time buying stocks was not possible in nearly all small broking houses. This happened because people who were trading in F & O had to bear heavy losses so there was lot of margin pressure on these broking houses/ private brokers. Due to this, the stock exchange only allowed these brokers to square off the position of the current traders. Many traders had money to buy stocks but could not do so because of this problem. People who had accounts in a well established broking houses e.g. HDFC did not face this problem. Apart from this there are also many other advantages of choosing a well established broking house.
1. Would you gamble in a casino without knowing rules of the game? Of course not. Same way never invest without having a basic understanding of the stock market. Stock market never forgives and has no emotions.
2. No one can time the market. Not even the best of analysts whom you may have seen on TV ,magazine or a newspaper. If they could do so they would be rich like anything and wouldn't be trying to earn by giving tips to others.
3. Overconfidence is harmful in all aspects of life. This is true in stock market too. Do not increase your investment if you have had success just once or twice.
4. Do not trade with emotions. Emotional traders lose more than what they earn.
5. Keep in mind that you cannot always be right. But remember that stock market is always right. If you short in bull market or you go long in a bear market then you are most likely to lose money. Easy method is to always follow the market.
6. Do not invest all your money in a single stock, no matter how positive the news is. Diversify your investments. This will reduce risk of heavy losses.
7. NEVER ever take a loan and invest your money in the stock market. An experienced person will never advise you of that.
8. Do not blindly trust any analyst or a trading software. People claim to have best of knowledge about a stock and they advice others to invest in a stock. But actually their earnings are not from investing in that stock but by selling you these advices. These advices can be seen in a magazine, television, stock brokers, research analysts etc. It is always better to do your own proper research. It would not take more than 7 hours in a week to find a good stock to invest.
9. Start booking profits partially when the markets are high. Do not wait for a correction. Partial profit booking means you will keep increasing your cash reserve with the rise in markets. So with lot of cash in hand, when market falls you will have a good amount to invest at low prices.
10. Cut of your losses. Also you must avoid increasing your losses by investing more and more in a falling market. It may come as surprise to most of you but most of the investors hold on to a stock when it's price is falling day after another and later on sell it at huge loss.
11. Buy at low price and sell at higher price. Most of the investors track a stock for few days and buy after its price has already risen a lot ( Overbought ). Later on they either sell at a loss are get stuck in a stock for a long time.
12. Huge sums of money have not been made by trading daily but by investing for a long term. Look for long term trends of the market and a company. Returns of 20-50 times or even more can be earned if you invest in a multibagger stock for a long term.
Read: How To Identify A Multibagger Stock ?
13. When markets are rising everyone seems to be bullish and when markets fall all become bearish. Best of traders are the one who don't follow others but instead look for signs of trend reversal. Imagine how much money you would have made if you would have predicted SENSEX to rise from 8000 levels in 2009.
14. Do not chase a stock. Keep cash ready and wait for the right price or invest in some other stocks. Your wait might be a long one but remember " everything comes to him who waits ".
15. Do not invest in Futures & Options without having good understanding of it or else it might be your last trade.
Read - What Is The Difference Between Stocks And Futures ?
16. Over-indulgence must be avoided. There are too many experts in the market ( television, magazine, analysts, brokers etc. ), it is advisable to think before you act. Do not keep changing your portfolio on the basis of these recommendations. Again I would recommend you to carry out your own research before taking any action.
17. Remember that two forces that drive the market are fear and greed. When market was at 21K levels everyone seemed to be bullish. Reports were that SENSEX would soon touch 25K levels. People who could not control their greed bought more and more anticipating huge profits. Later on when SENSEX fell to 17K levels in two days, these people found themselves under huge loss. Same way when SENSEX was below 8K levels there was so much fear in the market that people did not consider it as good investment opportunity. Most of them wanted to wait for the SENSEX to fall to 6.5K levels. Unfortunately they never saw those figures and missed a golden opportunity of investing.
18. Most often stock market moves before the news is out. By the time everyone comes to know about the news, the stock price may already have moved. So if you wait to invest till the news is out you may miss the train.
19. Just like in any other field a good trader must have two qualities- commitment and discipline. People who trade in the stock market just on the basis of their luck are mostly losers.
20. Don't go for penny stocks. Certain unheard stocks rise by 20-50 % in just 2-3 days. This makes many traders to jump into that stock. However, most of the times the prices of these stocks jump on the basis of rumors and later fall more than by 20-50 %. In every bull run certain penny stocks outperforms the SENSEX or NIFTY and they are considered a hot pick by most of the traders. But when market falls these stocks are worst hit. These are the kind of stocks that can ruin all your investments.
Read: 10 Mistakes That Causes You To Lose Money In Stock Market
21. Be very cautious when you notice that only one trend is visible. Stock market is not uni-directional. If it is going in only one direction then there are lot of chances of a sudden trend reversal.
22. Avoid opening an account in a small local broking firm. In Jan. 2008 market fell from 21 K levels to 17 K levels just in two days. At that time buying stocks was not possible in nearly all small broking houses. This happened because people who were trading in F & O had to bear heavy losses so there was lot of margin pressure on these broking houses/ private brokers. Due to this, the stock exchange only allowed these brokers to square off the position of the current traders. Many traders had money to buy stocks but could not do so because of this problem. People who had accounts in a well established broking houses e.g. HDFC did not face this problem. Apart from this there are also many other advantages of choosing a well established broking house.
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