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Thursday, 6 June 2013

Important Things To Do And Don't For A Trader

What must I do now?

This is the question probably every equity investor would have asked himself a number of times in the past few months.
With the stock market moving to dizzying heights before succumbing to gravity, it’s easy to get nervous or over-excited.
Here’s what we suggest you do when the bulls and bears kick up a lot of dust.

What you must NOT do

1. Don’t panic
  • The market is volatile. Accept that. It will keep fluctuating. Don’t panic.
  • If the prices of your shares have plummeted, there is no reason to want to get rid of them in a hurry. Stay invested if nothing fundamental about your company has changed.
  • Same is the case with mutual fund. Does the Net Asset Value deep dipping and then rising slightly? Hold on. Don’t sell unnecessarily.

2. Don’t make huge investments

  • When the market dips, go ahead and buy some stocks. But don’t invest huge amounts. Pick up the shares in stages.
  • Keep some money aside and zero in on a few companies you believe in.
  • When the market dips –buy them. When the market dips again, , you can pick up some more. Keep buying the shares periodically.
  • Everyone knows that they should buy when the market has reached its lowest and sell the shares when the market peaks. But the fact remains, no one can time the market.
  • It is impossible for an individual to state when the share price has reached rock bottom. Instead, buy shares over a period of time; this way, you will average your costs.
  • Pick a few stocks and invest in them gradually.

3. Don’t chase performance

A stock does not become a good buy simply because its price has been rising phenomenally. Once investors start selling, the price will drop drastically.
Same is the case with mutual fund. Every fund will show a great return in the current Bull Run. That does not make it a good fund. Track the performance of the fund over a bull and bear market; only then make your choice.

What you MUST do

1. Get rid of the junk
  • Any shares you bought but no longer want to keep? If they are showing a profit, you could consider selling them. Even if they are not going to give you a substantial profit, it is time to dump them and utilise the money elsewhere if you no longer believe in them.
  • Similarly with a dud fund; sell the units and deploy the money in a more fruitful investment.

2. Diversify

  • Don’t just buy stocks in one sector. Make sure you are invested in stocks of various sectors.
  • Also, when you look at your total equity investments, don’t just look at stocks. Look at equity funds as well.
  • To balance your equity investments, put a portion of your investments in fixed income instruments like the Public Provident Fund, post office deposits, bonds and National Savings Certificates.
  • If you have none of these or very little investment in these, consider a balanced fund or a debt fund.

3. Believe in your investment

  • Don’t invest in shares based on a tip, no matter who gives it to you.
  • Tread cautiously. Invest in stocks you truly believe in. Look at the fundamentals. Analyze the company and ask yourself if you want to be part of it.
  • Are you happy with the way a particular fund manager manages his fund and the objective of the fund? If yes, consider investing in it.


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