HOW TO MAKE EFFECTIVE INVESTMENT IN THE STOCK MARKET:

?1)???What is the purpose of investment: Always first define the meaning of Investment-whether it is a short-term investment like intraday trading or long-term investment for more than five years? Depending upon the period of investment, your strategy should be determined. Hence it is essential to define this.

?2)???Investment vis-à-vis speculation: As per Graham's definition of investment, an investment operation promises the safety of the principal and an adequate return upon thorough analysis. Note that investing according to this definition has the following three elements:

?·??????You must thoroughly analyze a company and the soundness of its underlying businesses before you buy stock.

·??????It would help if you deliberately protected yourself against severe losses.

·??????It would help if you aspired to adequate, not extraordinary, performance.

? Mindset of Investor Vis-a-Vis Mindset of Speculator

? An investor calculates what a stock is worth based on the value of its business.

? A Speculator gambles a stock will go up in price because somebody else will pay even more for it.

? Investors judge the market price of the stock by established standards of value

? Speculators base their standards of value upon the market price.

Investment is such a game wherein you can lose in the end if you play by rules that put the odds squarely in your favour.

? Like gambling, speculation can be exciting but the most dangerous way to build wealth.

? People who invest make money for themselves.

? People who speculate make money for their brokers.

Techniques of investors hold good in the long term, and hence they can sustain for an extended period

? Speculators' techniques hold good in the short term, so they make money quickly but cannot sustain in a long time.

They plan to make a profit in the long term and hence thinking is long term

? They plan to make a profit immediately and hence thinking is short term.

If you still wish to speculate, then you should not invest more than 10% of your portfolio in speculation. Please ensure that you never allow your speculative thinking to spill over into your investing activities.

?3)???Stop loss: In the case of short-term investment, investors must make a stop-loss provision to restrict your loss. Similarly, there must be a target for profit, and once that target is achieved, you must exist from stock immediately.

?4)???Entry and exit Point: It is essential in the stock market that you purchase the shares at the right price, meaning you enter the stock market at the right time and the same way you exist or sell the stock at the right price to profit. However, these entry and exit points are not in your control. Hence it is essential to be patient and ensure that you make investments only based on the right price. You should never fix a price that never sets a buying or selling price when buying or selling. When the market reaches a point where your charts and rules indicate it should be purchased, place a buying order at the market. Limiting orders has cost many men thousands of dollars.

?5)???Diversity in the portfolio: It is advisable not to make all investments in one basket but to diversify to spread the risk. The young generation should allocate more % of their investment in the stock market to take a higher risk than people in mid-age or retired ones. No more than 75% of your allocation should be made in stock. Ideally, one should restrict its investment in the stock market to 50% depending upon the investor's age, risk-taking capability, and investment goals. Risk-taking ability is determined not only by age but also by whether the investor has his own business in which he may require cash, or which is a risky business having fluctuating income or is having salary income or if two family members are earning which makes the source of income more secure and stable.

?6)???Protection against Inflation: Every year prices of goods and services are increasing at a much faster space and rate than the rate at which our salaries are increasing. Hence investment in the stock market is one of the effective ways to protect our actual income.

?7)???Understanding the nature of the industry of the scrip, you plan to purchase: You must invest in those stocks whose nature of business you know. Hence, it is essential to understand the heart of the industry, the leading players in that industry, the nature of competition, demand products, profits margins, capital intensive, etc. It is essential as an investor to decide to invest in a particular scrip based on your research and fundamental analysis rather than on someone else's recommendation. It is also essential to study the company's annual reports and understand the future of the company.

?8)???Factors affecting the price of scrip: An investor needs to understand what various factors are due to which cost of the scrip is affected. Move of the competitor, development in industry, the announcement of budgets or government policies that affect all the companies in the country in which it is operating, sentiments of the market, the economy of the country, global factors, etc. are some of the factors that can affect price scrip.

?9)???Keeping track of the price movement of the scrip daily: It is essential to study the past prices of scrips, their graphs, and charts and monitor the price of scrip daily. It is one of the main reasons many investors are not able to compile with and hence lose opportunity sometimes to encash.

?10) Investors should invest based on knowledge and not sentiments: Emotions do not work in the stock market. Hence fear, hope, etc., does not help to invest. It only makes the investor panic. Accordingly, make investments only based on knowledge and not based on emotions. Emotion is one of the primary reasons why many investors have lost money in the stock market. You cannot gain understanding without spending time on making a study. Hence time is money in the stock market; devote time to do research and prepare yourself.

?11) Keep yourself updated: Do not cling to old ideas or theories. Learn to follow the trend, regardless of what you hope or think or what statistics say. Then only you will make money.

?12) Mistakes are reversed immediately: If an investor comes to know after investing in a particular scrip that his decision to invest was wrong, they need to exist that investment even at a loss. The only way to rectify the mistake in the stock market is by living, even if you need to book loss.

?13) The target price for entry and exit: Based on the research done, it is essential to determine the target price you want to purchase scrip and the target price you wish to exist. Do not expect abnormal profits in stock markets. Many traders make the mistake of expecting too much profit in the stock market and thereby lose money. Follow the trend.

?14) Capital: In the stock market, entry and exit points are not in your control. Hence, once you plan to invest in the stock market, you must have surplus capital that is not required in case of emergency and can be funded when the opportunity is there. Hence you need to reserve capital and keep it idle and wait for an excellent chance to occur.

?15) A successful investor does the opposite of human nature; he buys a stock when there is terrible news and stocks are falling and exists market, when there are good news and stockpiles are rising. This attitude is essential to make a profit. However, you must be in a position to determine the extent to which stock is going to fall or rise. The stock market always discounts the future in the present. Hence when the good news is announced, the market rises and must have already considered that factor while determining the scrip price.

?16) Time to stay out of the market: You cannot make money by trading in the market every day or getting in and out every day. There comes a time when you should stay out, watch, and wait until you determine a definite change in trend. There is often not much movement in the market, so it is better to be patient and wait until the direction changes.

?17) Joint account: Do not make investments jointly as your partner may agree when to buy and what to buy, but he may not decide when to sell or book profit. There could be a difference of opinion on the same. Hence it is better to make investments individually to avoid such kind of conflict.

?18) ?Time limit to hold for Profit: When you invest, you must have laid down a time frame within which you expect the stock to turn around and thereby make a profit. However, the investor loses patience when the scrip is not moving or is in a narrow range. In such a situation, it is better to exist stock if you see the opportunity to invest reserve in some other scrip wherein there is an opportunity to profit. Hence, do not hold on to the stock; you need to move on not to lose the new chance to invest and make a profit in the future.

?19) Short Sell: Many people guide not to short sell. However, the investor should go by the trend, and hence if the trend suggests that there is an opportunity to make money by short selling, you should do that, and there is no harm in taking that step.

?20) Identifying the trend: When the market advances, there is more demand for scrips, so the call goes to new highs, and prices of scrips increase. When correction retakes place, the selling power becomes more dominant, leading to a fall in the market to some extent. When supply exceeds demand, selling power is more than buying power leading down in the stock market. The most important thing is to identify the trend and act accordingly. In case of emergency war-like situations market discounts such situations much in advance. Hence do not expect that market will fall drastically when the problem is officially declared.

?21) ?Past does not guarantee future: It is dangerous to make decisions in the stock market based on past trends as future returns of stocks need not always be the same as their past when every investor believes that supplies are guaranteed to make money in the long run, will not the market end up being wildly overpriced, and once that happens, how can future returns possibly be high. The value of any investment is and always must be a function of the price you pay for it. Hence stock must be bought at the right price. If the investor believes in that philosophy that since the stock is a long-term investment, it can buy at any cost, then that view could prove wrong if taken based on the returns earned during the rosy period of the stock market.?The stock market's performance depends upon three factors: real growth -the rise of companies' earnings and dividends, inflationary growth, and, lastly, speculative growth or decline- any increase or decrease in the investing public's appetite for stocks.

?22) Higher the efforts more the return, lower the efforts lower the return: In the Stock market, investors who make more efforts by spending time in researching scrip, studying the past trend, keep track of market developments is more likely to earn better returns than the investor who makes fewer efforts and spends less time in doing above tasks.

?23) What should be your investment strategy-Aggressive or passive: There are two ways or approaches to investment- one is the aggressive approach in which investors continuously do research, selecting and monitoring a dynamic mix of stocks, bonds, or mutual funds. The second approach is creating a permanent portfolio that runs on autopilot and requires no further effort but generates very little excitement. The third approach could be a combination of both. If you have time to spare, highly competitive thinking, and relish a complicated intellectual challenge, then the first approach is suitable for you. The second approach is practical if you want to be in your comfort zone and not wish to spend much time. Both methods are equally intelligent, and you can be successful with either-but only if you know yourself well enough to pick the right one, stick with it throughout your investing lifetime and keep your costs and emotions under control.

?24) Common stock vis-à-vis Growth stock: Common stocks are large companies with a good track record and consistent growth. This stock is much safer to invest in as they have a proven track record they pay dividends regularly. But the challenge in buying stock is to ensure that you do not buy such stocks at high prices. It is suggested that the price limit should be set at 25 times of average earnings. Such a restriction could eliminate buying many good common stocks; however, the investor should justify that the price is worth buying. Growth stocks are mid-size companies whose growth potential in terms of earnings to share is high and upcoming. These stocks are a bit risky to buy as they are yet to establish their track record for a more extended period but can become the common stock in a few years. The problem in buying growth stocks is being sold at much higher multiples than their intrinsic value or current earnings. Hence there is the element of speculation in this type of stock. Hence, this type of stock is not suitable for defensive investors who cannot spare much time monitoring the price movements of this kind of stock.

?25) Portfolio Changes: The defensive investor needs to review their portfolio on an annual basis and determine whether any changes must be made. Firms with the highest reputation should be selected to manage the portfolio if the defensive investor cannot monitor his portfolio.

?26) Investment in IPO: When a famous IPO comes, the valuation is high, and hence as an investor, you will not get the opportunity to invest at an attractive price. Therefore, it is essential to consider that it may not be an excellent option to invest in IPO when the prices are high.

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