In previous articles I discussed about basics of Stock market and Demat account basics. If you are new to market and do not know basics terms then it is must to read these two introductory articles. You will feel familiar with the terms and basic knowledge to follow this article.
In this article I assume that you have already created Demat Account. You are ready to buy and sell shares and make profit. But after creating Demat account follow below tips or you may book loss and come out of market soon.
I have seen people very active on first couple of months and then they loose interest. After sometime they totally come out of market booking loss and regret decision of entering into it. Due to this I am writing this article to make sure you do not make same mistakes.
1. Transfer amount you are willing to lose
Now this is most important of all tips. The amount of time you are in market is important. It teaches you great deal.You should not jump into it immediately. It should be phase wise. People assume Stock Trading as get rich quickly scheme. They invest lot of money too soon and if they suffer loss they will come out of market.
So you should only invest very less money initially. I would suggest transferring 10,000 INR for the first time or as per your risk appetite. You should assume that this money you are using to learn basics of market. It will also teach you character necessary to be in market.
Using this initial amount you should play for couple of months. This will help you in long term.
2. Invest but do not trade for first 6 months
This is one of the important tip I give to everyone. You should no trade for first 6 months. This does not mean you should not buy or sell shares during this period. You should do this but you should not trade shares. I have written separate article on difference between trading and investing.
You should read that article for more details on difference on these two. Remember trading may seem to fetch you quick money but it also makes you poor quickly. So I do not suggest trading for beginners. In fact you should first learn to invest and make profit then from the profit earned you should trade.
This way you are not making loss. Your initial principal amount is safe and even if you loss money in trading your profit is gone only.
3. No option trading or Futures for 1 year
Options and Futures both are risky trading options. You will be very tempted to try both of them initially. You may earn money quickly in couple of trades. This will tempt you to increase stake money in next few trades.
Then in one of the trade you will book loss. All your profit is gone and you will get demotivated. One or more loss and you are out of market. Profitable Share market traders and investors are those who remain in market.
Option and Future trading requires capital , risk appetite and learning. You need to understand lot of things before making money using these instruments. You also have to act quick to succeed. So I always advice Beginners to skip these initially.
I will write series of articles covering Options and Futures till that point you can skip it.
4. Focus to beat inflation only
Many enter stock market thinking it similar to Gambling. You should have luck on your side to make money.They will enter trade believing their luck and may get one or two profitable trade. But this is just coincidence it may not work always.
People with above foresight always get out of market in 3 to 6 months. Note market is not a get rick quick scheme. It is rather get rich with time scheme for sure. You should plan to beat inflation every year. Planning that way will work wonders for you.
If you get beat inflation every year then slowly you will make fortune.People try hard to get 50% or so profit every year. But remember this feat is not achieved by best mutual funds or stock pundits. So for initial first year you should think to beat Inflation.
If you can finish the year with 15% or 10% profit then you have done good job. The knowledge and character you built in first year will help you grow your profit handsomely in coming years. You may have one or two bad years but in long term you will be successful Investor.
5. Do not hunt for Multi Bagger Initially
Multi baggers are stocks which give you handsome returns (more than double to triple or ten times). People often think they can spot and identify Multi Baggers. In this initial analysis period they often neglect quality stocks which will easily give you Inflation beating returns without any headache.
If Multi Bagger spotting goes wrong chances are you will be in loss. Stock Analysis is a science accompanied by Patience. The first is easy to master but second is very difficult. With time in market you learn lot of things.
These things are difficult to learn without spending time in market. So for initial period it is better to avoid Multi Bagger hunt. You should hunt them and track them but do not invest money in them or all money in them.
If you really want to invest money in a Multi bagger then you should invest 2% to 5% of your capital. But this should be in one trade. You should invest some amount initially and wait for some time may be one or two months even if prices are rising or coming down.
It is very tempting to increase your stake with rising prices. But remember Never Catch a running train.
6. Do not invest more than 10% in single stock
This is very common mistake made by Investors. Warren Baffett has said Never put all your eggs in one basket. It means you should never Invest in one Stock.
People often put all their money in one or two stocks. Market is cruel. It does not spare quality stocks as well. It may be that the stock is good but it went into down trend for some time (may be one year or so). So all your money is stuck in that one stock.
Your profit and loss will be dependent on that stock. If you can wait for one year or so for that stock to turn profitable then it can work for you but it is very difficult. You may see other stocks rising and your one falling. So you will be tempted to book loss in that one stock.
Sometimes stock go into downtrend for few years in that happens then you are out of market. So it is better to split your investment into multiple stocks and sectors. This way you are insulating your investment. Some stock may have profit and some may have loss. This is the concept used by Mutual Funds and all top investors.
They invest your money in different stocks across different sectors. No one can pick all the wining stocks. The best investors pick more winners than losers. Put in other words the profit from winners is more than the losers.
Conclusion
I have tried to pen down all the important points based on my experience in case you have want to have other points added then you can pen down your thoughts in comment section below. From next sections we will dive more into Investment and Trading.