Before investing in the secondary market, take a breather and evaluate yourself. What is your type? Are you an investor or a trader?
--By Harendra Jung Thapa
Investing in stocks in the secondary market is a platform for those with an appetite for taking high risks. The chances of experiencing both enormous profit or staggering loss go hand in hand when taking on such a gamble. So to counter the risk, every individual investor or trader must develop and stick to smart strategies to get the best possible returns. However, before investing in the secondary market, take a breather and evaluate yourself. What is your type? Are you an investor or a trader?
People often confuse the term investors with traders. Investors are more like stock holders who buy with long term benefits in mind and are more or less passive when buying or selling stocks. They have an appetite for taking lesser risks and tend to avoid getting into the volatile market. They are, comparatively, more attracted to IPOs/ FPOs, rights and bonds.
On the other hand, individual stock traders in the true sense are the ones who do most of the buying and selling of shares. They are the risk takers and keep a close watch on the market. They actively participate in both the rise and fall of stock shares and collect the information which could have an impact on the share prices of the stocks they hold, or are about to purchase or sell. Moreover, they prefer making short term profits in repetition. Although the ultimate goal of both investor and trader is to maximize wealth, their strategic approaches differ owing to the behavioural instincts they portray.
If you want to be an investor in the true sense and reap the optimal rewards, the following tips could be to your advantage:
• Apply for IPOs, right shares and FPOs whenever they are issued but with proper study of the company’s overall profile starting from promoters, vision and feasibility of business, capital size and future business prospects, year to date business growth, vulnerability to various types of risks.
• Comparatively, if the rate of interest on deposits being offered by banks and financial institutions are lower than those of bonds, then allocate certain investments into bonds.
• In the bearish market, consult with merchant banking experts or expert investors and pick up the shares with special consideration of likely dividends. Focus on purchasing blue chip stocks to have minimal risk exposure and take the chance for comparatively better dividend payouts.
• If you are to take a measured risk, choose a mutual fund product which is comparatively safe and guarantees a certain fixed return.
• Be in touch with market experts for valuable information on the secondary market.
However if you are or want to be an individual stock trader then you could reap better returns by incorporating the following rules of investment in your plan:
• Have your eyes continuously set on the day-to-day transactions of the share market.
• Short list the companies whose stocks you are targeting to buy. Spend some time studying their past financial performances, financial ratios, dividend payouts, reserve funds, management team, promoters etc. to give you a better insight into the companies you are about to invest in.
• Monitor the ups and downs of the share market and preplan your entry and exit points in the volatile market.
• Capitalize on any down turn, downward rally or low during the bearish phase as an opportunity to make quick growth. Buy the shares of those which will give you good returns and are easily sellable in the market.
• Similarly take the up-turn, upward rally or high of the bullish phase as an opportunity to sell out for a profit. While selling, never wait for the index to top when disposing your shares. This could land you in the soup if the price of the concerned scrip starts to tumble. The safest and better option for you at such a juncture would be to break your stock-lot into several small ones and sell them at intervals. This will fetch you higher returns than it would selling the whole lot in a go.
• Avoid speculations, false rumours and never fall prey to greed. Greed is the major obstacle to overcome at the time of profit booking.
• Also invest in IPOs and FPOs but with proper study of the fundamentals.
• Miss out no right shares or use your renunciation option to renounce the shares for a price.
• Do not get intimidated by panic sales triggered in the market and instead keep calm.
• If the shares have been purchased at higher prices and market sentiment pushes down the price of the stock then at such times take the stop loss option to minimize the loss.
• Diversify your portfolio and always maintain a liquidity for opportunities that come by.
• Keep yourself informed and updated on all kinds of business news which could have an impact on share prices.
• Apply the tools of fundamental analysis to derive the intrinsic value of stocks and technical analysis to trace out the stock price movements.
• If your strategies fail to deliver occasionally then consult the merchant banking experts or stock trading experts.
Finally, we get a lot of investment ideas for free when talking with so called investors or traders. There is no harm in hearing what they have to say but analyzing and authenticating every piece of information you get is your part of the game. So, be open to suggestions and new ideas but make your own decisions!
The author is a freelance writer, excel trainer and data consultant.