The stock market is considered as a better option to earn the maximum profit for ages. Investing in the stock market gives more returns than any other investment. As there are many risks involved in trading in the stock market, hence investor has to select the stocks carefully to earn the positive return. Don't just go for the name of the company before investing, one must do proper research before investing in stocks.
One important thing before investing in the stock market is to find which stocks are doing good business. Good business can be judged by their competitor's patterns and how strong the brand stands in front of others. An investor should try to understand the company business and the various events that can affect the business.
While investing one must check if the company is following ethical practices. This will help to understand that the company will sustain for a longer duration. Do the share valuation before investing in the same. Invest with your mind and not the heart. If one does not invest with the mind, then instead of creating wealth, the investors will burn their fingers badly. One must always prefer market intermediaries that are registered with SEBI (Securities and Exchange Board of India). Make a clear communication with the broker/agent who is taking care of your accounts. Always read all the documents before signing the papers. Keep a watch on the stocks showing sudden ups and downs.
The lower the price, the cheaper the stock
Actually, the price of the stock has nothing to do with whether the stock is cheap or not. If you have to choose between two stocks priced 10rs and 100rs respectively, the stock selling at 10rs is not necessarily cheaper than the stock selling for 100rs Price is what you pay and value is what you get. The difference between this price and value decides how cheap is the stock, not the absolute price of the stock.
Lower the P/E ratio, more attractive the valuation of the stock
Price-to-Earnings Ratio, or as it is more commonly referred to, the P/E ratio, has got to be the most commonly used and also the most wrongly used valuation metric. Low P/E ratio does not necessarily mean that the stock is cheap! If anything, it could be telling you that the earnings are of poor quality. Markets are, at most times and places, efficiently priced and concluding that the stock is attractive, based on low P/E ratio alone, is equivalent to saying that you know better than the markets
Acting on news faster means getting better returns
You can sit on your computer screen all day. You can have the CNBC switched on this entire while. But trust me when I say this, as a retail investor, you are never going to be the first one to get any news! Somebody has already made money on that breaking news that just flashed on the tv screen and in fact, is counting on your acting on this breaking news, in order to make more money at your expense! In fact, always assume that you are the last one to be getting any news!
A stock should go up after a good earnings report
I have seen this misconception frustrate new investors like no other. You buy a stock expecting the company to report good earnings. Just as expected, the company does deliver good numbers. You imagine how much the stock will gap up the next day. Instead, the stock gaps down!
Actually, after the earnings report, at least in the short term, it is not the earnings performance of the company that drives the stock performance, but what is important is how the reported earnings fared with respect to the earnings expectations
Booking profits early and holding on to losers
It is highly unfair of me to attribute this mistake just to new investors; experienced investors make this mistake just as often. The previous 4 mistakes are easy to correct, but this one is very difficult to correct as it goes against some very basic principles of human nature. I will do a detailed post on this in the coming week but here is how you can think about this mistake.
I made all the above mistakes when I started investing. These and many more. Even after 10 years of investing in the markets, I continue to make mistakes. The market tells lets me know about some of my mistakes in a few days or few months.
Investor must required MFP when investing in stock market.
MONEY – required capital as per financial capacity
FOCUS – focus on stock specific with proper entry / exit levels – find balance sheet / EBITDA details / corporate actions / management details & strategy / about share holders details – etc*
PASSION – wait until actual decide price comes to sell – not sell at small profit booking & avoid roomers – focus on minimum stop loss with maximum gain profit holding.
(Author Mr Varun Mehta Vice President Buisness Development, KIFS Trade Capital)