The Covid pandemic has played spoilsport in our lives in many ways. The associated risks have brought in our sharp focus the need for insurance, saving, and playing in the stock market, aided by plenty of free time and coupled with the fear of attrition in jobs and services in some sectors of the economy.
Consequently, the stock market, directly or through the mutual fund route, came in handy! Opening of millions of demat accounts and systematic investment plans (SIP) of mutual funds bears testimony to this hypothesis. This is because the stock market is a proven way of wealth creation, which doesn’t involve much formalities and funds, to start with. The success in stock market depends on many factors, of which smart buying and selling strategy is crucial.
Smart Value Buying Of A Stock
Here are a few things to keep in mind while buying a stock.
Watch and wait before buying: There is no dearth of opportunities in the stock market, and opportunity lost is not lost forever, but calls for a wait and watch approach, rather than rushing for shopping based on news, rumours, expert tip or recommendations. Hence, one must judge, weigh out an option, and go for shopping with conviction, based on available information and facts.
Buy stocks from promising and sunrise sectors: There are cyclical, and there are evergreen sectors; so as a beginner, prefer buying from evergreen sectors, such as information technology (IT), pharma , banking and financials, selected public sector units etc., and the upcoming sector of renewable energy including ethanol, and electric auto companies to begin with.
It always pays to buy stocks in the field of your interest and experience.
Suitable price: Set a realistic price target for buying a stock, based on your conviction and judgment, gauging the market trend.
Buy in a systematic investment plan (SIP) mode: Buy in smaller lots at a time with SIP. Disciplined and long-term SIP often pays. Also, keep your portfolio diversified and expanded to a manageable extent. Putting all eggs in a basket may prove harmful.
Buy a stock with intrinsic value: An intrinsic value stock is one which has sound fundamentals and seems promising, but is available at a discount, because of market conditions.
Averaging price of holding: Sometimes, owing to judgmental error or market volatility, one might have bought a stock at its peak price. However, if you believe in the potential and value of the stock, buy more in one or two lots on every dip. That said, avoid averaging for a fundamentally weak stock. The lower the price of the holding, more safe and secure it becomes in the long run.
Dividend yield: Give due importance to high dividend yield stocks, and to build and expand your portfolio advantageously, try to plough back dividend, partly or in full, for buying more shares, if money is not urgently required.
Ignore rumours and unauthorised news: Don’t rush to buy instantly on the basis of a rumour or a tip, rather wait for the price to settle down reasonably. That is the time to buy. Also, it is important to understand whether a recommendation is for trading or for positional buy. This is a common observation that mostly a stock price shoots up on a tip or a news during trading hour, but gradually it often loses steam towards the end of the closing hour or the next day. Buying the targeted stock then may prove favourable.
Smart Tips For Selling A Stock
Here are a few things to keep in mind while selling a stock.
Set a realistic price target for sale: Set a tentatively realistic price target of your stock, for sale. And sell it as soon as it meets your expectation, devoid of greed. Since the markets are highly volatile, by undue wait in the hope of catching the peak price, you might miss the bus.
On the other hand, quite possibly, the price of the equity may decline mildly or sharply, after you have sold the stock. Don’t panic! Rather watch its price movement for a few days, and depending upon your conviction and judgment on the value and promise of the stock, you may re-enter, especially during its consolidation phase. This way, one could be doubly benefitted. One, you pocket some profit, and second, you still own the share at a lower price of holding.
Do not sell a value stock in full: For a promising stock, where you have developed conviction and are holding it for several months, and you plan to sell on getting expected profitable price, do sell it, but partially. Keep an eye on its price movement for a few days and then plan to either sell more or rather buy more.
Don’t wed a stock: Don’t buy a stock and sleep over it, i.e., hold it and forget. Sometimes, this may prove very damaging. Therefore, occasional review of holding as well as selling appropriately to undertake need-based churning is significant. The sad fate of stocks like Yes Bank, DHFL, Reliance Power and many more, for example, which at one point of time were blue chips, is self-explanatory.
Occasional Review Of Portfolio And Profit Booking
It’s important to occasionally review your portfolio and book profits. Here’s how to go about it.
Risk management: Try to keep price of a long-term holding of a stock to the barest minimum, to be on the safer side. Nobody knows when a bull market will turn bearish and vice versa. Therefore, holding a stock at a reasonably low price, for long term, gives you certain immunity towards market risks. Judicious averaging of price of a holding might prove helpful.
Keep stop loss: To safeguard value erosion of a stock during intense volatility, especially for short-term investment, keep stop loss and exit as soon as stop loss price is reached.
Avoid panic selling: As a rule of thumb, during turbulent times, follow a contrarian approach, i.e., buy when everybody is rushing to sell, and sell when most others are crazy to buy. This often proves beneficial. That said, avoid panic selling during such a situation.
The author is a former employee of the Government of India and has worked in the agriculture sector.
Disclaimer: Views expressed are the authors’ own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.
