Stock Market Tips 2

Rule 2: Don't buy inactive stocks
Active stocks are those in which transactions take place every day, or almost every day, on the stock exchange. At the other extreme are stocks in which transactions take place rarely, if ever. The latter are called inactive stocks. In this book, an inactive stock has been defined as one which is transacted less than two times a month, or not at all.

The main reason why stocks are inactive is because there are no buyers for them. They are mostly stocks of companies which are not doing well and whose future prospects appear to be dim. Naturally, nobody wants to buy their stocks. As a result, existing stockholders of these companies find it difficult to get rid of their' stocks, even at very low prices. And, if nobody wants to buy these stocks, why should you? Why should you allow yourself to get stuck with an investment, which you can't offload at will, whenever you want to? We would strongly advise you to avoid investing in inactive stocks.

How does one find out whether a particular stock is inactive or not? The simplest way is to regularly scrutinize the stock market quotations which appear in the daily newspapers. If you find that a particular stock has not been quoted for a long time, you can presume it is inactive. Some newspapers, like The Financial Express not only indicate the last quoted price of each stock, but also the date when it was last transacted. This information can help you to confirm whether a particular stock is inactive.

Inactive stocks can generally be bought at very low prices. This is obvious since such stocks generally find no buyers. Inexperienced investors looking for bargains are often attracted to such stocks by virtue of their low prices. This is how beginners are normally trapped into making disastrous investments. Beware of such bargains! If you come across a bargain, remember there has to be a catch in it somewhere. It is better to hunt for value, and pay a fair price for it, than to look for such apparent bargains.

Every time you buy a stock, you must remember that one day you will want to sell it. If you think you are likely to face difficulty in selling it don't buy it! This is a sound investment principle which you should never lose sight of, no matter how cheap or attractive a particular investment may appear to be. Never allow yourself to get caught with illiquid stocks. They are only pieces of paper without any value. Stocks have value only when they are readily encashable.

Of course, it is possible that a stock which is inactive today could become active tomorrow; just as a stock which is active today could become inactive tomorrow. It all depends upon the degree of buying interest in a particular stock. If buying interest builds up in a stock, it can easily move from the inactive to the active category.