Stock Market Guide

Maxims to follow appoint investment bankers, usually called merchant bankers or lead managers, who do all the necessary tasks to get the money from the investors to the promoters.

Who are the players? Retail investors, institutional investors and operators all swim in the pool we call the stock market. Knowing who participates or invests with you can help you understand how financial might or a herd mentality could even affect a good investment decision by you. And how a bad investment decision by you seems good because you have other investors making the same decision.

What drives the market up and down Understanding what moves the markets is crucial to safe investing. Stock markets are highly emotional in the short term. Their ups and downs are deeply affected by reactions of investors to real or rumored events. Sentiment and perceptions, rather than reality, can often send the price of stocks soaring or sinking overnight. Many of these short term movements have nothing to do with the real state of the economy or political happenings or the outlook for a specific stock. For example, fears of political instability might bring a rush of sellers even though these fears may be mere speculation.

Of course there is more happening in the markets than mass psychology. They respond to all types of economic, political and business events. If you are just starting to invest in stocks, it may help you to study the way markets have reacted to events in the past ten years.

Believe in gravity What goes up comes down and vice versa. The stock market moves in a cycle; It goes up and comes down. The cycles may be unpredictable and a downturn may last longer than expected, but remember that since stock markets have been around (and they have been around for almost 300 years) they have always come up after being down and always come down after being up. So don't make the common mistake of thinking that markets that are rising will continue to rise and those that are falling will continue to fall. You are going against your own Logic if you believe otherwise. A case in point is the US market. From 1917 to 1929 it rose by five times and lost all its gains in the great depression by 1932. But would you believe it, it is up 400 times since then.

Buy at points of maximum pessimism Buy fundamentally strong stocks when everyone else is selling. Experts often discount the fact that the most important element affecting the stock markets is sentiment or perception of how good or bad things are. Even if the economy is strong or an individual stock is a good buy, investors have to 'believe' that the economy is strong or a stock is a good buy.

Never follow the herd Don't panic. If you do you will always lose. There is a saying in the financial markets, 'Dumb money follows smart money.' The trick is in making decisions before the whole world realizes how great the stock is. So if the information is already in the newspapers, it may be too late to invest in the stock or you might be getting into an investment where smart investors are getting out.

Buy when there is gloom and doom Buy when markets continue to hit historically low levels. History shows that the herd is always wrong. Buy when stocks have hit rock bottom. Remember, no market in the world has ever gone to zero.

It's the long term that is rewarding Plan to leave your money in stocks for at least a year. Sell it earlier and the taxman may get to bite a substantial part of your gains. Leave it for over a year and you may be able to reduce your taxes substantially.

Is the stock value for money? Some of us who will spend time bargaining with our vegetable vendor for small change don't think twice about putting up thousands on a recommendation. Stocks are just like products. just as you won't pay for something that is not worth it, avoid buying overvalued stocks. Usually the most popular stocks are the most overvalued because 'the herd' has driven the price up without any rational thought.

The stock markets are not a gambling den Don't let others fool you into thinking that you could increase your investments in multiples you could end up losing in multiples too. Statistically, the odds are that 97 times out of 100, you will end up losing money if you don't know or understand the stock you are buying.

It's not what the company says, it's what the market expects Stock prices react to expectations. If the market expects profit to jump 40 per cent and it jumps only 30 per cent, the stock will usually fall even though the growth was impressive. On the other hand, if a company that was expected to declare a loss declares a small profit it could see its stock price shoot up since performance exceeded expectations.

Believe in yourself and don't overrule what you see Do you own research. For example, if you are buying a consumer goods company's stock, check if the company's products sell at your local grocer. Or if you are buying an airline stock, ask yourself how you or others feel about its service. You may be surprised how little people think before buying stocks and how little they believe in their own experience. You may be using a bank and you don't like their service, yet you believe your business newspaper and are ready to buy the stock. Remember, if a company has a poor service record, it cannot continue to show great results in the long run.

See what institutional investors are doing Buying or selling by institutional investors like mutual funds, insurance companies and banks is a good indicator of how the stock or the market would move. The information is available in your daily newspaper. Read it and if possible don't do the opposite of what institutional investors are doing. Institutional investors usually behave as a herd and can cause large movements in stocks.

Remove the weeds If you have done any gardening, you will realize the importance of removing weeds from good grass. Weeds will eat into good grass. The same way dead investments will pull down the returns on your entire portfolio. Spend half an hour every month reviewing your portfolio of stocks and remove stocks that have developed insoluble problems, like bankruptcy, plant closure, environmental problems, etc.

Don't try to time the market You don't know when to get in and get out of a stock. That is a fact since no one knows. Markets make most of their annual gains in just three or four weeks of the year. So if you try to get in and out quickly you could lose both ways. But if you stay invested, chances are you will catch the gain wave.

Don't buy illiquid stocks Stocks that don't have active trading or don't trade hundreds of thousands of stocks daily are risky. Let's say you need to sell the stocks immediately. If you had a big quantity and the stock not actively traded, you may not be able to find a buyer at the price you want to sell. And even if you find a buyer, he may be ready to pay sharply lower prices. You may have bought a good stock which may have closed higher yesterday or for the past few days. But when you need to sell, there may not be enough buyers.