5 Golden Rules of Stock Investments

Things To Remember While Investing in Stock Market

Introduction

In this article, we are going to discuss in detail the 5 golden rules for stock market investments which the investors should adhere to.

An assured formula has yet to be discovered for acheiving the success in stock market. Still here are some golden rules which, if followed prudently by the investors, may increase their chances of getting a good returns from the stock market.

5 Golden Rules of Stock Investments

Rule 1 : Invest in Business Which You Understand

• The approach for stock market investment should be a business oriented and not the specific stock oriented. In simple words, an investor should invest in business instead of merely focusing on the stocks.
• The investor should invest in those businesses which they understand. The understanding of the business of the company is very important before investing in that stock.
• In order to be successful investors, we must acknowledge that there are some types of companies we understand, and some we do not understand, and then we must only invest in what we understand.

Rule 2 : Never try to Time the Market

• An investor should never try to time the market. Nobody has ever done this successfully and consistently over multiple business or stock market cycles.
• Catching the tops and bottoms is just a myth. Timing the market, is a false notion or misconception till today and will remain the same in the future also. In fact, many people have lost far more money than people who have made money in the attempt of timing the market.
• However, a majority of investors, do just the same thing ie. they keep on trying to time the market. And thus they lose their hard-earned money in the process.
• So a prudent investor should never try to time the market. In the long-run, Time in the market is far more beneficial as well as significant than timing the market. An investment should spend more time in the volatile market to give the maximum returns for the investor.

Rule 3 : Avoid Herd Mentality

• The typical buyer’s decision is usually highly influenced by the actions of his associates, colleagues, or relatives. Thus, if everybody around is investing in a particular stock, the tendency for potential investors is to do the same. But this strategy is bound to go wrong in the long run.
• Investor should strictly avoid having the herd mentality if he don’t want to lose his hard-earned money in stock markets.
• One should always remember the key lines of Warren Buffett – “Be fearful when others are greedy, and be greedy when others are fearful!”

Rule 4 : Keep Realistic Expectations

• Investors should keep realistic expectations from their stock investments. We should never enter into the stock market by keeping 30%-40% returns expectations. There is nothing wrong with hoping for the ‘best’ from your investments, but you could be heading for trouble if your financial goals are based on unrealistic assumptions.
• For Example, lots of stocks have generated more than 50% returns during the great bull run of recent years. However, it doesn’t mean that you should always expect the same kind of return from the stock markets.
• Expectations from the equity investments should very rational. What do we mean by rational expectations? Rational expectations towards equity investments should be equal to (current GDP % + 5%). We should plan our financial planning goals according to this realistic returns expectations.

Rule 5 : Follow A Disciplined Approach

• Volatility comes hand-in-hand with a great bull runs in the stock market, resulting into the cycles of panic moments also. The volatility witnessed in the markets has inevitably made investors lose money despite these great bull runs.
• However, the investors who put in money systematically, in the right shares and held on to their investments patiently have been seen generating outstanding returns.
• Discipline in investing is about forming good habits and then doing them consistently. Hence, it is prudent to have patience and follow a disciplined investment approach besides keeping a long-term broad picture in mind.