- Invest for the long term - investing should always be done with a long term view in mind (between three to five years is a good time span). Investing for the long term allows enough time to sway through the volatility that often accompanies the stock market. However, it is also important to keep investing regularly as well. The power of compound growth can only occur over a long period of time. This approach also creates discipline in the investor.
- Invest regularly in small amounts - investing should be a way of life - just like exercise - and should be done regularly. Instead of investing a large amount at a time, it is better to invest small amount at regular intervals of time. A monthly investment is a popular option. This helps in neutralizing the effects of volatility in the market, so that you get more shares when the price is low and less shares when the price is high. Over time, the average cost of accumulation of shares levels out. This also creates a sense of discipline.
- Invest in businesses not just stocks - when you invest in a company's shares, you are buying a little piece of ownership in that company. Buy a business, not just a stock. This approach will make you more aware of the type of business the company is engaged in, its growth prospects and the quality of the company's management. The management of a company is important and an investor should be familiar with at least a few of the people behind the company. This is not a rocket science though. You do not have to know the complete ins and outs of the company, but you should have a fair idea based on research, news items, word of mouth and plain old common sense. Investing in stocks ultimately is about investing in the future prospects of that company and it is always necessary to know something about the nature of business, the products or services, the growth history, management and future plans of the company.
- Do your own research - with the growth of the Internet, it is now possible to do research on companies very easily. Sites like Google finance, yahoo finance, money.rediff.com, moneycontrol.com and economictimes.com are good places to start. The basic things to look at are the PE ratio, growth of EPS, book value, growth of profits, profit & loss, dividend paying history among others. It is better to shortlist companies based on your own research. Look for companies that have lower PE ratios. A company with a low PE ratio generally means that the company's shares are available at a good bargain. However, there are some exceptions. Not every company with a low PE ratio is a good investment. The PE ratio is more about how much of a bargain you are getting on your purchase and does not necessarily indicate anything about the quality of the company itself. But it's a good place to start, along with looking at the profit growth over a few years and growth of EPS (Earnings per share) [PE ratio by the way is -- price of the share/EPS].
- Never invest based on tips - for every 'tip' there are more than a thousand people who lost money. Never invest in any company based on a tip alone. Information is everywhere, but there is also a lot of misinformation. Tips are like rumours, they spread like wildfire and could be with some vested interest behind them. Never believe them. Tips are different from suggestions or tips based on some bona fide research and suggestions received through such sources can be explored by doing further research and then considered.
- Invest only risk capital - never invest money in the stock market unless you have a comfortable amount of money saved up in a bank account. Money invested in the stock market should only be that which is left over after paying all the monthly dues such as children's school fees, rent, bills, etc. As mentioned earlier, invest small amounts regularly.
- Know the risks before investing - while stock markets can be very rewarding, there is an inherent risk in investing in the markets. Stock prices can crash and leave most of your capital wiped out. Know this before investing. If you are willing to take this risk, only then invest. However, like all risks you can say that the greatest risk of all is not taking any risk. Higher the risk, higher the return. Know this and be prepared for what goes with the territory.
- Diversify your investments - Don't put all your eggs in one basket. Buy stocks of companies across sectors. Do not over-diversify. Scattering your capital across too many stocks is as bad as not diversifying. A basket of 10-15 stocks is ideal.
- Book profits regularly - it is important to book profits at regular intervals. Whenever your investment reaches a predefined target, it is good to book partial or full profits. You can always buy again later at a lower price. No money can be made until you sell. The idea is to buy low, sell high and then repeat.
- Cut losses - always remember not to hold on to losing stocks for too long unless you have a very good reason to. The feeling of not wanting to be wrong is not a good reason. We all learn from mistakes and everyone including investing legends like Warren Buffet and Rakesh Jhunjhunwala also have made their share of mistakes. Learn to acknowledge your mistake and cut your losses by selling your losing shares. Consider it as a price for tuition.
- Patience is a virtue - small drops form an ocean, fortresses are made brick by brick and so it is with building wealth. Do not entertain dreams of becoming rich overnight. Start investing early and regularly and keep doing it over years. It takes years to build wealth. Over years you can accumulate good quality stocks that will earn you great riches. But it takes time. Do not be impatient. Enjoy the ride.
- Enjoy yourself - investing is a lot of fun and everyone has their own style of investing and their own choice of portfolios. Invest in companies that you are interested in and enjoy the ride. Remember this always - never let success get to your head and never take failure to your heart. Keep trying and enjoy!
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