Most new investors come with dreams of making a lot of money in the stock market. They invest in stocks that are recommended on business channels (like CNBC) or they buy stocks that are suggested by friends.
After buying, the stock either goes up or falls down. If it falls, the investor becomes hopeful of getting back the price they paid. If the stock rises in value, the inexperienced and impatient investor tries to book small profit.
While this approach could help you make some quick money, be rest assured that the market will take back all the money you earned and more.
The stock market is not a place for people without knowledge. If you come here to make quick easy money, the market will take money from you and eventually you will give up and quit.
The right approach is to spend the first 1-2 years learning, without investing too much of your hard-earned money.
Once you gain knowledge, the market will teach you 3 important lessons:
Hold your winners: Don’t be in a hurry to sell stocks that are in profit, especially those of good companies that have a track record of performing well in the last 5-10 years. If you find a steady compounder, don’t sell it for small profit. Human greed to make even more money, could make you sell these stocks and buy weaker companies that have been rising very fast in the recent past. The end result, in most cases, will not be good.
Buy more of your winners: If a stock has given you good returns, the biggest issue you’ll face is the inability to pay a higher price for a stock that you already own. For example, if you bought Bajaj Finance at 800 rupees in 2016 and it went up to ₹ 2900 in 2018, you should’ve ideally added more when the stock fell by more than 30% to less than ₹ 2000 during the NBFC crisis in October 2018. Good companies can fall because of industry-wide crisis or extreme temporary reaction to announcements like demonetisation. When such companies fall, it’s time to buy more shares. Share prices of good companies or industry leaders are the first to rise. Bajaj Finance went from ₹ 2000 to ₹ 4000 in less than a year after the NBFC crisis. Even though you paid more than your initial buying price of ₹ 800, you still made 100% profit on your new investment within a year. Always look out for such opportunities in the stock market.
Sell your losers: If you have a stock in your portfolio that has been steadily falling, it could be time to book loss. This is another mental block that most inexperienced investors face. The inability to book losses is a bad habit that you should get rid of. You will notice that a stock in your portfolio that falls by 50%, usually ends up falling even more. Eventually you lose hope and keep it in your portfolio, hoping that some day the stock will recover. In most cases, they never recover. Example of such companies are Reliance Power, Sintex Plastics, Unitech, DHFL, Vakrangee, Yes Bank etc. Do your analysis, read on the internet; if there are reports that the company is in trouble or is involved in some sort of scam, sell the stock as soon as possible, even if you are in heavy losses. Selling these stocks immediately will, in most cases, turn out to be the right decision.