Want to make big money in stock markets? Follow these 8 simple tips

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New Delhi | Published: December 9, 2016 10:26:45 AM

Investing in stock markets is always fraught with risks. And it becomes more risky in a volatile market like the current one.

Although no sure-shot formula has yet been discovered for successful equity investing, still there are some time-tested strategies which can help one emerge a winner in the stock market. (Reuters)Although no sure-shot formula has yet been discovered for successful equity investing, still there are some time-tested strategies which can help one emerge a winner in the stock market. (Reuters)

Investing in stock markets is always fraught with risks. And it becomes more risky in a volatile market like the current one. Simply because no one knows in which direction the market will move and whether one will be able to make any money if one stays in the market for some more time to come. So, a majority of investors are in a sort of dilemma whether to invest, hold or sell in this market.

Although no sure-shot formula has yet been discovered for successful equity investing, still there are some time-tested strategies which can help one emerge a winner in the stock market. Here we take a look at some of them:

1. Have a proper financial plan
Before you start investing in stocks, ensure that your financial health is sound enough and you have a proper financial plan in place. Simply because you cannot start investing if you haven’t done your financial planning and are unable to meet your routine expenses. Also, “any long-term investment means a long-term commitment. If you do not have enough provisions for emergencies or short-term needs, there is a higher probability that you will dive into your stock investments, thus not sticking to long-term commitments. So, have a proper financial plan in place before dabbling into the stock market,” says Jitendra P.S. Solanki, a SEBI-registered Financial Planner and Founder of JS Financial Advisors.

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2. Invest only if you have surplus funds
If you want to take risk in this volatile market, then see whether you have surplus funds which you can afford to lose. It is not essential that you will lose money in the current scenario. Your investments can give you huge gains too in the months and years to come. But that is not hundred percent sure. That is why you will have to take risk. So, invest only if you have surplus funds.

3. Avoid the herd mentality
It is generally seen that investors get heavily influenced by the actions of their relatives and acquaintances. For example, if others around are investing in the stocks of a particular company, the tendency of common investors is to do the same thing. This strategy, however, is bound to backfire in the times to come. It goes without saying that one should always avoid having the herd mentality if one doesn’t want to lose one’s hard-earned money in the equity market. It is not without reason that Warren Buffett had once said that one should be fearful when others have turned greedy, and be greedy when others are fearful!

4. Invest in business not stocks
Never invest in a stock. Invest in a business instead. That too a business you understand. In other words, before you invest in a company, you should know well about the business of that company. Understand, for instance, what they buy and sell, and how they make money. Thus, the more you understand the business of a company, the better you will be able to monitor your investment. Also keep in mind the past performance of a company because if a company has performed well in the past, it has a better chance of performing well in the future too.

“Whenever one wants to invest in the stock market, one should start his journey not looking at stocks or stock prices, but at the business of a company. The moment this becomes the starting point, speculation and dabbling will automatically stop,” says Jimeet Modi, CEO, SAMCO Securities.

For example, before the stocks of King Fisher Airline got delisted, in its history of the last 10 years it had never made any profit except in one year during the initial period. So, who would want to buy such a loss-making business? “I don’t think anyone would. On the other hand, look at the business models of companies like ITC and HDFC Bank. If someone wants to buy a business for the long term, then companies like these should definitely fall under the radar of his investment,” he says.

5. Diversify your investments
Diversification at the threshold should be practiced. Too often investors get carried away by any one idea or theme, and more often than not they over invest in one single stock beyond prudent limits which makes the entire investment an emotionally-charged playground.

“Because of overexposure, the ups and downs in the stock price make one too much greedy or too much fearful, taking away the rational thinking process of the investor which causes all the damage. Thus, holding shares in a diversified portfolio will keep the rational thinking intact for a long-term financial progress. Proper diversification also automatically brings in patience, which is a key requirement for long-term wealth creation,” suggests Modi.

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6. Invest with margin of safety
Investing with margin of safety is essential for the financial health of investors. Investors often make mistakes, but when the purchase price of a stock is low, entailing a high margin of safety, then even if the business identified does not turn out to be a great investment, the possibilities of losing money reduces. For example, on an average basis cement stocks are currently available 40 times their earnings, but there are some stocks that are available at 20 times their earnings. Buying such stocks would entail margin of safety on those stocks.

7. Take informed decision
Investing in the stock market is quite different from investing in, say, PPF or mutual funds. Therefore, one should always do proper research before putting one’s hard-earned money into socks. That is, however, seldom done as investors usually go by the name of a company or the industry they belong to and don’t try to understand their business models.
“If you don’t have time or temperament for doing your research, then you can also take the help of a financial advisor whom you trust. But never consult a planner who is interested in only increasing his own bank balance,” suggest experts.

8. Keep fear & greed in check
The danger of being swept away by unrealistic expectations is rooted in two common human emotions: fear and greed. Therefore, “investment decisions driven by fear or greed are rarely part of a wise strategy in the long run. Remember in the stock markets, tops and bottoms are only for fools,” says Atul Surana, Certified Financial Planner, Catalyst Financial Planning.

 

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