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9 ways
to Conquer
the Stock Market
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Despite the Sensex and Nifty
making new highs during the
last few years, many retail
investors are seeing their
investment dreams end in a sea of red.
Losing money in the stock markets can
be as simple an exercise as earning sack
loads of it. People who get negative
returns are generally the ones who
invest in stocks with weak fundamentals
or enter the markets when the bull run
has already reached its crest.
Those who make money are usually
the ones who invest for long term in
top-notch stocks. When Warren Buffet was asked about his favorite investment
strategy, the legendary investor replied
quite laconically, “Buy good stocks and
hold forever.” While most of us may not
have the patience or the resources to let
our investments remain locked forever,
investing for a period of one to three
years is also a sound strategy.
Here are 9 tips to improve your trading
and investing skills: |
| As simple as this concept appears to
be, the vast majority of investors do the
exact opposite. Of course, no one can
time the market exactly, but you should
always avoid entering the market when
they are at their peak. Your ability to
consistently buy low and sell high, will determine the success, or failure, of your
investments. |
| If you want to make money in any
market, you need to mirror what the
market is doing. If the market is going
down and you take a bet on the stocks
going up in price, the market is right and
you are wrong. If the stock market is
going up and you are short, the market
is right and you are wrong. Other things
being equal, the longer you stay in
tandem with the stock market, the more
money you will make. The longer you
stay out of sync with the stock market,
the more money you will lose. |
| As long as the markets are open
for trade, traders and investors keep
making new bids and the price of
individual stocks keep moving up and
down, based on factors like - political
situation, corporate news flow and the
amount of liquidity that is available for
trade. The more extreme the move up or
down, the more extreme the movement
in the opposite direction once the trend
changes. So if you are holding a stock
that has appreciated sharply, then it
is likely that at some point in future it
might depreciate as sharply. |
| So the judgment of the markets cannot
always be trusted. At times stocks get
priced much higher than what they are
worth and at times they get hammered
much below their true price. If you are
looking for “reasons” that stocks or
markets make large directional moves,
you will probably never know for certain.
Investors make a big mistake when they
start assuming that the stock markets
are completely rational. To make a
profit, it is only necessary to know about
the direction in which the markets are
moving – and not why they are moving. |
| Stock markets generally move
in advance of news or supportive
fundamentals - sometimes months in
advance. If you wait to invest until it
is totally clear to you why a stock or a
market is moving, you have to assume
that others have done the same thing
and you may be too late. You need to get
positioned before the largest directional
trend takes place. The market reaction to
good or bad news in a bull market will
be positive more often than not. And the
market reaction to good or bad news in a
bear market will be negative more often
than not. |
| For maximum benefit you have to
learn to diagnose the influences of the
trend that is guiding your market. Since
the trend is the basis of all profit, every
investor needs to master the art of
diagnosing long-term trends to make a
sizable profit. You have to develop the
ability to get aboard a trend and stick
with it for a long period of time in order
to maximize profits. Contrary to the
short-term perspective of most investors
today, all the big money is made by
catching large market moves - not by day
trading or short term stock investing. |
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| If you feel that the markets are
peaking then do not think twice before
getting rid off those stocks that have run
up higher than what their fundamentals
permit. There is no point in holding on
to overpriced stocks only to let your
investments get mired in a sea of red. It
needs a certain trading discipline for you
to keep selling stocks that are getting
overpriced and buying ones that are
available at cheaper rates. If you do not
practice highly disciplined trading, you
will not make money over the long term.
Each one of us has to come up with his
own disciplined system of trading based
on our individual investment needs and
risk taking appetite. |
| You must avoid giving too much
credence to investment experts, market
commentators, financial analysts,
brokers, newsletter publishers, trading
authors, etc, who come on TV or in
newspapers and dispense free investment
advice. You should ask yourself, if
their investment advice is really worth
something why are they giving it for
free? You have to keep in mind that
these so called financial experts and
financial firms make money by selling
you something - not instilling wisdom in
you. You should make your own trading
decisions based on a rational analysis of
all the facts.. |
| If you run into losses in one sector,
you can still make money through
profits from sectors that are doing well.
The worst thing an investor can do is
keep himself fully invested in one sector
that takes a huge beating, wiping off
much of his share capital. For maximum
benefit, you should pick up at least 10
high growth sectors and diversify your
investments into all 10 of them. You can
invest more money in sectors that you
expect will do exceptionally well and
smaller amounts in low growth sectors. |
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