Golden Rules and a guide for beginners in the stock market…

Let us assume that you are beginning out in the stock markets. Obviously, there are a lot of questions and doubts in your mind. Should you be a trader or an investor? Should you focus on technical or on fundamentals? Should you focus on equities or mutual funds? Should I buy in bulk or in a phased manner? While there are no hard and fast answers to these questions, here are 10 points that will serve as your guide if you are just beginning out in the stock market…

10 Golden rules for stock market beginners

  1. Understand the equity process flow first. Before you start out in the stock market, understand how it all works. How you need to fund your trading account; how your demat account gets credited; how to read your contract notes; how to interpret your ledger statements etc? All this will be critical when you get to actual execution.
  2. A phased approach will serve you better than a lump-sum approach to investing. The phased approach has two distinct advantages. Firstly, it gives you the benefit of rupee cost averaging and reduces your cost of acquisition of shares. Secondly, you are only risking a small portion of your capital each time.
  3. Don’t be too enthusiastic about being a trader. The role of a trader may appear to be very macho but it is for someone who has been in the market for a long time. When you are starting out try to learn the ropes of the market by first understanding what you are buying and then understanding why you are buying it.
  4. Get into the habit of keeping strict stop losses early on. That will really help you in your later years. It need not always be a trader’s stop loss but it can also be a mental level wherein you will just decide to call it quits from that position. Stock loss based investing is a discipline that you need to inculcate to be successful in equity investing.
  5. Profit is what you book so get into the habit of booking profits and getting money into your bank account frequently. Don’t start off in the market with a long-term perspective and dream of becoming a Warren Buffet. In the equity markets, there is nothing as powerful as actually moving money in a and out of the market. Once you see profits credited into your bank account, your confidence and conviction will go up sharply.
  6. Research what you are buying. You do not have to be a professional analyst to understand stocks. If you understand basics of demand and supply economics you can do a good job of understanding the potential of stocks quite well. It is not rocket science and it is a lot of logic. First convince yourself that you see value in what you are buying and your own judgement must stand above all else.
  7. Keep grilling your broker / adviser with questions. If you adviser tells you that a particular stock is good then you need to know why. You need not take your adviser’s word at face value and you must do some background work on the internet to cross check. Even if you find a stock interesting, make it a point to ask questions. In fact, most advisers will be more than happy to assist you if you are genuinely interested.
  8. Be wary of quick money calls and tips. Remember, nobody ever made millions by listening to hot tips and Whats App messages. They are at best meant for your entertainment and treat it thus. You are most likely to be successful if you focus on the strength of the company you are investing in and do your own homework. You can better spend your time reading about the company rather than going by tips.
  9. If you really want to be a successful investor, you need to treat it with all the seriousness that it justifies. If you are looking at investing as a temporary diversion, then you are best advised to give it up. It calls for a huge investment from your side in terms of your time, effort and money too. There is really no other option.
  10. Know when to stay out of the markets. There are 3 important decisions you need to take as an investor; When to buy; when to sell and when to do nothing. Of these, when to do nothing is perhaps the most difficult and important decision. In times of market volatility and uncertainty, you will be best placed if you know when to stay out of the markets altogether. When in doubt; just stay out, is the golden rule.

Golden rules may be a misleading term but there is surely a framework that beginners in the stock market need to follow. Remember, you need to work hard, take your risks and bear your losses in the market. There is really no other way!

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