With the Indian indices: The National Stock Exchange (Nifty) and The Bombay Stock Exchange (Sensex) touching the skies, share market investment is turning out to be highly lucrative. But share market investments are like the tides of the ocean – they can either take you to the shore or sink your ship down. Keeping these things in mind, we have framed these 7 simple stock trading tips for beginners to help you increase your profits and minimize your losses!
The most important rule in stock trading is to be aware. By being aware, we not only mean being aware of the market risk that prevails, but also about the current affairs of the country and of the world on the whole. Political or social, economical or cultural, each type of event has its own impact over the stock market. Make sure that you follow the latest news from across the globe and only then choose your stocks to invest in.
Invest in sectors
A sector is a part of the economy made by companies indulging in similar businesses. In a lay man’s language, sectors bifurcation of companies based on their line of business. While you invest in a particular share, always keep in mind the sector to which the company belongs. A favorable business environment in favor of a particular sector can boost up the share price of companies belonging to that sector.
General Tip: Government reforms in favor of a particular sector might increase the price of shares of companies of that sector.
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Spread your investments
A wise man once said, ‘Don’t put all your eggs in one basket’. It means, never invest all your efforts only on 1 area. In the jargons of stock trading, it would mean that one must not invest all of the available money in just one stock. In fact, I would rather advise to invest not only in different stocks, but in stocks of different sectors all together to minimize the risk as much as possible. This will help to reduce the losses if the price of 1 share falls because it can be compensated by a rise in price of another share. For example, if you have INR 1 lakh to invest, it would always be advisable to invest the sum in 4 or 5 or more different stocks from different sectors.
Study the Financial Statements Well
The Balance Sheet of the company is a statement of financial positions of the company. It has a lot to tell, especially from the investor’s point of view. Next time someone asks you to buy a particular stock, never believe them and never fall prey to rumours. Make it a point to always read the financial statements thoroughly before investing into a particular share. We will soon release another article which will help you to understand and read the financial statements better.
The Price Trend
To make it clear, the most basic rule of stock trading that an investor should know is that the prices of shares do not depend on anything but simple demand and supply of the shares. That means, if the demand for a share of loss making company is high, the prices will go up. Therefore, it becomes important for an investor to know about the trend of the prices of the company.
You can find out the trend by looking at the price graph of the particular share. If the prices are constantly rising, it means that the demand for the share is high and the trend is positive and it may give good returns in the short term. If the prices are falling, it means that the demand is low and the trend is negative. Trend, therefore, becomes an important aspect to consider during investment.
Apart from the Price Trend, things like Resistance and Stop Loss are key terms which can be derived from the price graph. Since these are advanced topics, we will discuss them in our next set of articles on stock trading.
A lot of, in fact, a majority of stock traders focus only on the ‘price’ of the shares and not on the ‘dividend’ earned through it. People focus more on capital gains than the revenue income. But, there are some shares which may not give you high capital gains, but may give you very high rate of income through dividend. Many people miss the trick here and forego a large part of income they could have otherwise earned.
Also, one must not forget that while short term capital gain is a taxable income as per the Income Tax Act, 1961, dividend earned from Indian Companies is exempt up to the extent of Rs. 10,00,000. Therefore, if you happen to fall in the tax slab, dividend might end up giving you higher returns than stock trading.
General Tip: As per my observation, Government owned listed companies yield higher dividend than privately owned listed companies. This might be handy!
Patience is the key to stock trading!
Last but the most important rule of stock trading – patience! ‘A patient investor always earns’, said an intelligent person to another. It is not abnormal to face losses in stock trading, but over the longer period, you will definitely get nice returns if you have followed the above rules well enough. If you have invested in a good company after thorough examination of financial statements and other reports, all you need to do is wait for the benefits to arise. In the words of Warren buffet: ‘Our Favourite Holding Period Is Forever’. So next time when you see the prices of your stock falling, rather than losing hope, you can consider taking advantage of the situation and buy more shares at a lower price. The benefits due will always accrue with time.
So these were 7 simple yet extremely useful tips which can help you earn few thousands easily. We shall be coming up with more articles on investment decisions and stock trading in near future, keep following us! Do you have some more tips for the amateur traders? Leave your strategies in our comments section!