Important Stock Market Tips

Sometimes when the stock market reaches all time high, some investors are so buoyed up that they think the prices would continue to rise and never come down. This is a fallacious view, which is held mostly by the inexperienced stock investors. They, therefore, tend to buy the stocks even though the prices are rising. As is the nature of the volatile stock market, the prices of the stocks fall and the credulous buyers suffer losses.

So what is the tip for stock market investors in such circumstances?

The best course is to buy stocks when the prices are low and wait patiently for them to rise. Fix up a moderate and practical income target. For example, you may fix a target to make 10% profits on your investment.

Do not succumb to your greed thinking that the prices will continue to rise further and you will be able to make 50% or more on your investment. Always keep in mind the volatile nature of the stock.

A golden tip

A golden tip for stock market investors is to buy when every one else is selling and sell your stock when everybody is buying. Do not succumb to peer pressure. Do not run after the majority. Think out of the box. Do not consider yourself a fool for not joining the party that every body appears to be enjoying at the stock market.

Never invest in unknown penny stocks

Even if you cannot resist the temptation of buying when every body else too is buying, do not invest in unknown penny stocks. Do not try to follow the secret, insider’s hot tips that your friend’s knowledgeable friend may try to whisper in your ears.

Quite possibly the price of the penny stock might have tripled during the last fortnight but that was before your friend’s friend started to buy the stock. Chances are that the promoters of the company had started a buying spree for the said stock and spread rumors about the likelihood of the company being acquired by some foreign investor.

Future growth vs past performance

When you try to analyze the value of a stock before buying it, you must consider its chances of its future growth rather than relying on its past performance.

Past performance of any stock, even its promoters warn the investors in their ads, is no guarantee for its future performance. You may argue yourself into buying a stock because it has doubled in the past one year. Instead of gloating over its double growth, you should try to analyze the reasons for that ‘spectacular’ performance.

Could it have been the lack of serious competition? Could it have been the supply of raw materials at reduced costs just because the raw material suppliers had recently entered the market and wanted to popularize their product?

If you are satisfied with the reasons, go ahead and buy the stock of that company.

Allow time for your stock to grow

Allow some time for your stock to grow in terms of its market value. Do not buy a stock and expect its price to start rising from the next day. If you join a good company as an employee, do you expect your salary to be increased in one or two months? Moreover, the value of good stocks grows slowly yet surely. There generally are no spectacular quantum jumps. If there are any, they may have been manipulated and as an intelligent investor, you may be wary of buying such stocks.

Remember, if money could multiply in matter of days, everybody would invest in stock market and leave every other business. Growth of any asset takes its own time and the investor should cultivate the culture of patience. Ideally a minimum horizon of one year should be a good time.

Diversify your portfolio

‘Don’t put all your eggs in one basket’ is an age-old business advice and it stands good for all times. Even the best of companies may face hard times due to reasons beyond their control.

It is therefore recommended that you should diversify your investment portfolio among a number of good stocks. Diversification, however, does not mean that you should scatter you investment in scores of stocks. This may endanger your focus, as you may not be able to keep a track of the performance of each stock. They may add to your confusion.

Diversification does not only means dispersing your investment in various stocks; it also includes different investment plans such as IRAs, Education accounts, DRIPs, ETFs and so on.