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Understanding Stocks

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Understanding Derivatives

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By Nitin Gupta

It is widely assumed that stock market investment is game of professionals and experts. Sectoral movements and index volatility created extra fear factor for individual investors. Various domestic and global factors, economists’ expectations from economy and brokerages reports add another complications. Individual investors remain confuse over future of their hard earned money. Let’s consider some of them –
  1. While doing homework before investing we may find 5-6 companies in one sector which are worth investing. We believe that they have excellent track record and they will achieve our target. We make a mistake of allocating our capital to all these companies which are identical in nature. We need to understand that only one or two companies will be best to invest in one sector. So, we need more rigorous study of company’s track record to select best of pack before putting money in them.
  2. There is a strong misconception of not understanding various economic survey reports conducted by Govt/Pvt agencies. Simple excuse is “I don’t understand this so I have no idea how it works for market”. Read these reports carefully as these are very rich source of data. Try to correlate it with market movements. It will give better understanding of these reports and how it affects Stock Market.
  3. Everybody knows the basic rule of market “BUY LOW SELL HIGH” but what will be the lowest low and highest high nobody knows. So, without getting confused about when to purchase and when to sell better use every dip to buy. Therefore, it is famously said “DON’T TIME THE MARKET SPEND TIME IN THE MARKET”.
  4. It is commonly observed that once a stock is purchased at a particular price there is no further purchase is made in that stock unless until price of that stock falls below of previous purchase price. Being a small investor and having long term horizon we should not to be stick to this rule.
  5. Recent sudden surge in the market gives the feeling to retail investor of missing the bus. They try to follow momentum stocks which are of little heard companies or companies which are having heavy debt on their books. They may get trapped at higher valuations as stock price of such companies have already run up from 20%-50%. Rather than following momentum there are plenty of opportunities exist for long term value investors.
  6. Small and retail investor having liquidity crunch all time think of creating portfolios. Opportunities for creating long term portfolios occur over period of time when market falls. Market peaks are not the time to build portfolios of stocks which had already run up 25-30%. This is the time of lighten your basket of stocks which have run up and loss making stocks.
  7. Rotation of money from one sector to another is important characteristics of index which adds volatility to it. It is not necessary to follow index movements strictly. Individual investor should switch over from one sector to another depends on his/her time horizon. Warren Buffet famously said “MOST PEOPLE GET INTERESTED IN STOCKS WHEN EVERYONE IS. THE TIME TO GET INTERESTED IS WHEN NO ONE ELSE IS. YOU CAN’T BUY WHAT IS POPULAR & DO WELL”

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