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Golden stock market rules for novices

Last updated on: October 15, 2009 13:22 IST

There are rules and then there are more rules when it comes to investing in the stock markets. And there are more rules than more rules when it comes to investing the Indian stock markets.

Get Ahead reader Shawn Francis has boiled them down to just five out of his own experience.

The experts may know these but beginners will surely find them helpful.

Here go Shawn's five golden rules for stock market greenhorns that he made out of his own stock market experience.

Whether you agree or disagree with Shawn, or have your own golden rules for the stock market the message board below is all yours.

Rule 1: Don't put all your eggs in one basket

First and most fundamental rule: don't put all your savings in a single stock. The risk is just too much.

Diversification is the name of the game. Also, don't invest in different stocks of the same kind. For example, investing your money in four stocks like TCS, Infosys, Satyam and Wipro is not diversification.

All of them are IT majors and so the odds are that they will move together. Instead choose from a variety of sectors like pharmacy, energy, auto-ancillary, cement, sugar etc.

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Rule 2: Gold glitters

Last updated on: October 15, 2009 13:22 IST

Hedging your investments is extremely important. At times when the markets are experiencing sharp dips you don't want your entire portfolio to sink. In such cases invest in oil shares like Aban Offshore. This stock normally rises when the oil prices go up and that's when the other stocks are hit.

Coming to gold, we Indians are obsessed with three things: snow, fair skin and gold. So the prices of gold never falls down drastically. Especially when the markets go down, gold prices always shoot up (the times are a changing now though).

So make gold a part of your portfolio.

Please note that when I mean gold, I mean mutual funds which deal in gold. Don't let your mother or sister sweet talk you into buying gold jewellery. Their rationale will be 'ki investment bhi ho jayega aur hum bahar pehen bhi sakte hai' (gold jewellery is an investment as well as have ornamental value).

Convincing as it may sound, it doesn't make good business sense because you lose a lot of your money on making charges.

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Rule 3: To B or not to B

Last updated on: October 15, 2009 13:22 IST

B, C and Z (that would rhyme if you are American) group shares, much like their movie counter parts provide cheap thrills.

These shares shoot up only to fall back harder. So beware of them. They offer quick money, but if don't get out soon enough you may burn your fingers and hands too. These shares form about 10 per cent of my portfolio.

Ideally, you shouldn't hold such shares for more than a month. Invest, get a 15 per cent return and move out. Don't get greedy.

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Rule 4: A watched pot never boils

Last updated on: October 15, 2009 13:22 IST

A common mistake made by market novices is that they keep checking the worth of their portfolio every ten minutes and get worried if they don't see significant improvements.

Once you buy a stock, set a target, both in terms on time and value.

When either of it is reached, get out of it. Pronto!

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Rule 5: Diamonds are forever... and stocks aren't diamonds

Last updated on: October 15, 2009 13:22 IST

Lastly, never get emotionally attached to your stocks.

I know this may sound silly to you, but it does happen plenty of times. We tend to view favourably stocks that have performed very well for us. We want to hold on to them forever.

I had this share of Gujurat Mineral Development Cooperation (GMDC). Had bought it at Rs 85. Shot up to Rs 550 in 6 months.

I was in love with the stock.

Then it started dropping. Rs 500. Rs 400. Rs 350. I should have sold it. But I didn't. I hung on to it. I was going to be loyal to it, I decided.

Guess what?

It doesn't work that way! GMDC hit a low of Rs 35! Last month I sold all my GMDC shares at Rs 90. Two whole years after I had purchased them at Rs 85! Taking into account brokerage and tax, even a savings deposit in a bank would have yielded more! So remember selling at the right time is vital.

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