Money Tree

1. Buy stocks while they are moving up; don’t try to catch a falling knife.

An old saying, but true. The most important thing in trading is to trade with the trend. A stock should be bought while it is in an uptrend and is moving up. A number of investors think that is has already moved so much how far it can go and ignore the stock thinking that they should have bought it a month ago. But actually there are more chances of a momentum stock’s climbing higher than those which have yet not started moving up. Last year sugar stocks fell more than 50 percent and a number of investors thought that they have already halved, how far can they fall so it becomes a good buy, but the fundamentals did not suggest buying sugar stocks and now they have went down to as low as a third of what they were a year ago. There are oversold situations in the markets and there is a bottom to every fall, but it is impossible to predict a bottom. We have to wait till the downtrend reverses and the stock starts rebounding, there you have to catch it and ride the momentum. Let the knife fall, vibrate for some time and then you may pick it up; there are less chances of injuring yourself.

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When it comes to make a long term call, I think 9 out of 10 analysts will be right or may be 10 out of 10, and even an experienced investor who reads well, will be able to make a right call but when it comes to making a short term call it becomes an arduous job for the most learnt researchers. There are so many factors which contribute to the movement of prices that it becomes very difficult to predict their trend. However an insight of all major events, news flows, financial information and basics of the company gives us a view whether the price of the stock is justified or not, is it worth owning the stock at the given price or the stock is already overvalued. It works well if you make a prediction for the long term, but the short term movements are always governed by macroeconomic factors, general trends and Government announcements which are not predictable, therefore it is easy to make a long term call by using fundamental analysis. And that is why most of the mutual funds take long term calls considering them to be safe. For example you find a stock which is going very cheap and fundamentals suggest buying the stock but suddenly some negative factor triggers in US and there is a sell off in Global markets and our markets are also not spared and that stock also could not swim against the stream and is hammered down and a good stock gives you a negative return in the short term in spite of being a value buying. But if you have bought if with a long term view and the company is fundamentally sound the stock will rebound when the crisis is over and will give you a good return in the long term. The whole discussion was to bring home the fact that if you are novice to this market make your first call a long term call, there are more chances of making money. After some experience you can become a swing trader or a day trader but first be an investor.

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In my previous article in this series we had learnt to prepare ourselves mentally to get into the markets and learnt some basic exercise before actually jumping into the markets. In this article we shall try to cover practical aspects of investing like opening of various accounts and understanding basic concepts of trading.

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Prepare yourself
I have seen most of the first time investors losing big money in the stock markets and you would come across a number of such investors with terrible experience in stock markets that they hate to even discuss about any shares and feeling very secure with their money being invested in Bank Fixed deposits, traditional insurance plans and Government bonds with a return of about 8 percent a year. They had a sour experience because they had not prepared themselves for investing in stock markets, they simply saw some other fellow making huge money on some news driven stock and next time put a huge sum on his advice or saw an expert on a news channel strongly recommending a stock and the markets turned otherwise. Such people do not dare to take another chance and believe that perhaps they are not made for it and resolve not to even look at it during rest of their lives. The experience might have been different if they would have spent some time researching and had some patience before making a first time entry. Some basic steps for the first time investors are listed hereunder which will be useful to make a successful entry into the stock markets and for those as well who had a terrible first time experience.

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