Rule No.1 Invest from your savings / surplus money
Investing in shares must be done from your surplus money which you may not need in the near term. Share prices are subject to volatility. Even after careful selection of share to invest it doesn’t mean that it will be out of volatility. All the shares are subject to ups and downs but what is important is the share price is on the up move over the long time. Invested shares are to be held for a period of three to five years (at least one year). We can see chart of any share, we can understand it has ups and downs. Hence if you need money at certain point of time, the share price may be little down or in the down trend and you will be forced to sell the shares at a loss. Hence investing from surplus money which you may not need in the near future, is a good decision. Never invest borrowed money in share market – investing borrowed money in equity is not advisable
Rule No.2 Think long term, see the big picture
When investing in shares, remember you are investing not in the share but in the company’s growth. When the company grows, the share price increases thereby your investment value will be increasing. Traders might think about short time price fluctuations to make profit but an investor stays in the invested shares thereby making value growth. Someone must stay invested three to five years or even beyond five years.
Rule No.3 Start investing early and be consistent
Start investing early and be regular to invest in equity. Set aside a portion of your income which you don’t need in the near term. Invest for your future requirements not for daily income. Set aside the investment for your future needs and be regular to allocate some money every month. When we approach the investment with this attitude the urge to booking profit will not force you to sell the shares every now and then. Don’t forget to follow Rule No. 10. Investment can be done in SIP (Systematic Investment Plan). By this method, you invest every month same amount in shares – whether the market is up or down you can invest. This way stock prices are averaged for high and low.
Rule No.4 Low priced shares doesn’t mean it is available at attractive price
There is a tendency that many investors feel that if the share price of a company is less – small value shares or penny shares – are good for investment. This is a biggest misconception about share market. It doesn’t mean all the penny shares are worthless. We need to analyze the fundamentals of the company and to check whether the price is attractive comparing its valuation. If the prices are attractive (whether the share price is very small or it’s a high priced one). There are companies whose shares are traded more than Rs.1,000 per share even some shares are more than Rs.20,000 – to buy one share of MRF Ltd, we need to pay Rs.72,000 (during June 2016, it was only Rs.32,000). On the contrary there are many shares trading below Rs.20, some shares are trading at even below one rupee…!!! Hence it is not the price alone which decides the investment opportunity. Fundamentals, Industry outlook, Quality of management, Corporate Governance, etc. are the deciding factors.
Hence don’t buy a share just because it is trading at very low price or don’t reject any share just because it is big in terms of share price. Focus on Value not the price.
Rule No.5 Don’t invest in Circuit Shares
This is very important rule because many investors are trapped in this type of shares. For every share there is maximum and minimum price level up to which the share can increase or decrease in a single trading day – this is called as the circuit limit. For example, if a share price is Rs.100 and the circuit limit is 10% then in the next day trade it can increase up to Rs.110 (upper circuit) or decrease up to Rs.90 (lower circuit). Shares are hitting circuit limit either upper or lower due to various reasons. Upper circuit may hit if there is a good industry news, good result and any positive news about the company and vice versa. This is normal. But some shares hitting circuit every day then there is something unusual you have look in to.
Rule No.6 Don’t buy any share just because everybody is buying
This is one another mistake common among investors. It is the normal tendency of investors to invest in a share just because of all known people are doing. This kind of investment can be done after doing proper analysis and if convinced about the company and its valuation then investment can be done. Investing blindly following others should be avoided.
Rule No 7 Don’t invest in any share which you don’t understand
nvestment in share is not just buying a piece of land in a high demand locality. There are about 5,000 companies registered in Bombay Stock Exchange (BSE). Your options are wide open to buy any share but selecting the correct one is the challenging job. Before investing in any share, the investor must understand the business of the company, able to view its future, able to understand the quality of the management and many other factors to be considered so that the investor is convinced to enter into a in a particular share. Hence the investor must understand the company and its business before making investment decision.
Rule No.8 Don’t try to time the market
Investment decisions can be made any time. Investor should not wait for the time to invest just because the share market is at its high. BSE / NSE index is not the representative of the whole market, Sensex is the index of 30 shares and Nifty is the index of 50 shares only. There are many other shares listed in the exchanges. Hence waiting for the index to come down may not be advisable.
Rule No.9 Create a diversified portfolio – Don’t invest more than 15% in any share
Never put all your eggs in a single basket. Investor shall not put all his money in a single share or two. One can invest maximum 15% of the invested amount in any one share. This will create a diversified portfolio and the risk of portfolio erosion can be minimized. When we say diversified portfolio, one must invest in shares of companies from different sectors. Since some sectors dominate in the market sometimes and other sectors will be good in certain times, diversification of industry is required to have a balanced portfolio. While investing all the money in one or two share is a risk, the another risk is investing in too many shares which will be difficult to manage the portfolio. Hence keeping ten to fifteen shares is optimal for a portfolio.
Rule No.10 Regularly review your portfolio
nvestment doesn’t stop once you buy a share but the investment continues until the share is sold and profit is booked. The investor must be vigilant all the time. The investor should review the portfolio regularly so that any shares which are not performing or underperforming can be taken out of portfolio and then to include the one as per your expectation. This doesn’t mean the portfolio must be shuffled daily, keeping the long term in mind the portfolio must be reviewed.