I had a long chat with a relative a few months back at a wedding function, while waiting for the bride and groom to tie the knot. Apparently, he was keen on dabbling into stocks. With the intention of having another source of income. So that he could say 'goodbye' to the IT lifestyle eventually.
Here are some interesting parts of the discussion, and some suggestions in general to some of my old friends, teammates who wanted me to dish out some gyaan on the topic of stock markets.
His idea was clear, but the execution wasn't going to be easy in the timeframe that he had outlined. But possible, if one gets into short term trading. The time frame for each trade could be 2 days to a week. But in order to succeed in this, one must be extremely choosy in picking the right trade, and super disciplined. The golden rules here are, "Cut your losses, but let the winners run" and "If you can't take a small loss, then prepare to take the mother of all losses".
Anyway, this was something that I tried for over a year, succeeded somewhat. But when in a bad trade it kept me stressed out for days together, lack of sleep, fidgety, nervous. Moreover, this is not something that a software engineer should be doing while at work.
But with a longer view i.e. as a long term investor in the market one can achieve the financial goals as well.
A personal disclosure here. Till date, I have not sold a profit making stock, and I have not held onto a stock which has gone past my maximum loss point..
All it needs is 15 minutes of quick reading time everyday and about 30 minutes to an hour of research over the weekends.
For newcomers, I'd suggest what my cousin taught me and which worked very well for me. Apply in new upcoming IPOs. Just check for the various analysts' ratings before investing. If you are lucky and have some shares allotted to you, then consider partial listing gains and keep rest for long term. If not allotted, then move onto the next IPO.
One may want to invest upto 25% of monthly income into the stock market regularly. My only suggestion is not to expect magical returns overnight. It's not betting in a horse race. It's investing in a business, and good returns take good time. Fixed return instruments provide around 7-9%. If you get 15% from the stock market, you've really done well. Keep investing in small quantities, and let the power of compounding do it's magic.
Once you are done with a few IPOs, move onto putting your money in good quality large cap stocks. Large cap means large companies with established businesses. They are the most heavily traded stocks in the markets. The returns are average, but they are safe investments.
Once you start seeing good returns in these, move towards mid caps and small caps. This is where the real money is. But mind you, these are equally risky. You must both be patient and sensible at the same time. If some stock you've invested in, goes below your predefined price, take a loss and exit. You can always enter back in.
When to invest is an interesting question. From my experience I can say that the best time to invest in small quantities when the markets are going down. Be greedy when everyone is fearful, and be fearful when everyone is greedy. Think away from the crowd.
This is what large financial institutions and stock markets 'Mavericks' do on a large scale.
Having said that I'd want to research the company that I want to put my money in. Management quality, and the nature of business are 2 most important things to focus on. Most successful investor billionaires like to invest in businesses which have a strong moat around them. They are both unique, and have have very few competitors.
And just to mitigate the risks, at any point of time, I invest only upto 20% of my total money on high risk investments.
Where to invest is another question that many people ask. We are in the middle of Acche din (read multi year bull run), the markets have run up considerably in the past 18 months or so. So very little money is left to be made in established large caps. Still, the good safe investments are in large private banks, infrastructure companies, capital goods and construction. Basically, the companies which are helping build India. Generally known as high beta, they move very fast in both directions.
IT, pharma are the defensives. They move slowly in either direction.
Every portfolio must be a good mix of large, mid and small caps. High beta and defensives. Suggest not to be heavy on any sector or theme.
There's one more group of stocks which provide good dividends. You may want to keep a couple of them in your portfolio.
Periodically track your investment in each stock, look for buying opportunities. And be prepared to take losses and exit. Taking a loss is like performing surgery on one hand with the other.
That's it for now. Happy investing.