Everyone loves euphoria in the stock market. However, gains in the stock market are not linear. There are market cycles where you can make money by buying when prices are low and selling at the top. However, it is easier said than done.
Investing in Soaring Stock Markets
No one with complete certainty can tell you how the market will behave in the future. The prices are rising now, but will they continue to grow? Or is this the highest it gets? Is it best for you to stay invested with the possibility of more gains and higher peaks in the future? Or is this the tipping point for a downward trend of the markets?
Devising a correct investment pattern and strategy can become a challenge in such situations. To help out from such situations, we have jotted downfive basic investing principles in stock markets.They will prove to be as valuable as gold for you. Follow them to make the most of soaring markets through profits and escape through without any losses.
Opt for Stocks that pay dividend
You can gain returns from stocks in 2 ways – capital appreciation and dividend. When you arenot confident about how your share capital will appreciate, it is best to opt for dividend-paying stocks. Pick stocks that come with robust fundamentals and good balance sheets. Good dividend history is a crucial deciding factor in picking such stocks. Moreover, these shares stay relatively more stable as compared to the rest. Hence, your investment will not be much affected by market volatility too.
Stay wary of Speculative Trading
Soaring share markets and market volatility may tempt you in speculative trading. Speculative trading means quickly buying and selling stocks within a short duration with the sole objective of profits. It does not consider the fundamentals of the company or any other significant aspects. It merely relies on fate. And hence, it is risky. Remember, if you are not a seasoned speculator, you can get your hands burned in such situations. Soaring markets are not a time to practice speculation for newbies.
Strictly adhere to Stop-loss
Stop-loss is a technique where you are supposed to exit the market at a specific price point so that you donot sink intomore profound losses. The stop-loss technique acts as a safety net to protect you from a significant fall in the stock markets. For instance, let us assume you have purchased ten shares each for Rs. 100. Unfortunately, your share price seems to be dwindling below 100. Hence, you fix a stop-loss point at Rs. 95. As soon as your stock touches 95, you sell your shares and exit the trade. You have made a loss of Rs. 5 per share, i.e. Rs 50 in the total investment. But, let us assume this stock continues to drop and two days later reaches 70. Had you not set a stop-loss at 95, you would have to suffer a loss of Rs 300 in the total investment.
Similarly, this technique can also be applied when markets are soaring. You have to raise your target level to a higher price than your purchase price to book a minimum desired profit in peaking demands. When that is achieved, immediately book your profits and exit the trade. Donot fall into the temptation of higher gains. That helps you to be in a desired profitable situation in case the markets turn volatile later. For instance, let’s assume in the above example that the markets are soaring and hence, you have set a profit target level at Rs. 110. When your stock crosses 110, you sell it and book profits. In this deal, you made a profit of Rs. 10 per share. Assuming you had not sold your stock in anticipation of more gains, and after much volatility, the stock price landed at Rs. 105. You would still be profitable, however, your overall profits would be lower.
Diversify your Investment
Diversification of stocks is the most effective way to hedge volatility risks. When markets rise, every stock doesnot peak in tandem – some are good while some are better. So is the case when the market drops too. Hence, to fetch a good average return on your investment, it is wise to pick stocks with strong fundamentals and diversify your funds in them. Try not to concentrate only on onemarket capitalization or one sector for diversification. Rather diversify across sectors and capitalizations. Consider stocks that have zero or very minimum debt with a good return record, good growth potential, attractive current and past balance sheets, etc.
Do not Over-invest
The funds you invest should be as per your investment plan. Remember to anchor your boat in the stock markets with your risk appetite and pre-decided investment plan. Donot let a market situation trick you into over-investing. Over-investing clubbed with market volatility has the potential to sink you into deep trenches. Also, if you are a beginner and not well-versed with every market situation, avoid lumpsum investments. They can give you big profits, but alsohuge losses. Hence, stagger your investment through SIPs – it evens out volatility.
Conclusion
Stock markets work best with calculated risks, a couple of basic investment strategies, and plenty of research. You should also not underestimate the power of basic investment principles – they will always guide you to safer shores. Remember, for a beginner,always opt for a full-service registered brokerage company. It offers an array of additional facilities such as investment advisory, consultation, research, etc. These services will prove to be very valuable when you start your trade and donot know much about markets.
Disclaimer – ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. – ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai – 400 025, India, Tel No : 022 – 6807 7100. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose.
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