BASICS FOR BEGINNERS IN STOCK MARKET .....

Courtesy : Askmen.com

Few Stock Market Mistakes Investors Make

Investing in the stock market is one of the best things you can do with your money, provided that you know what you're doing. If you don'tknow what you're doing, you might as well take your money to Vegas — you might even get better odds. But if you're going to play the market, do it right.

Here are some common mistakes many investors make. Know them and avoid them.

 

1- Buying a stock because it pays a dividend

A profitable corporation can distribute profits in the form of dividends. In other words, each share gets a certain amount of money. While it's great to get a dividend, it's not wise to hunt them. So, the mistake that a lot of guys make is to buy a stock shortly before they expect it to pay a dividend.

While that sounds good, the problem is that the price they pay for the stock likely reflects the anticipated dividend. In other words, shopping for dividends means you're overpaying.

What to do instead: It's good to have dividend stocks in your portfolio, but they're not the only way of making money. Instead, hold a diverse portfolio, knowing that some of your stocks will likely pay a dividend and others won't for a very long time (if ever). If you do that, you'll find that you're one step further on the road to holding a collection of blue chips (which tend to pay dividends) and more speculative securities (which may be years away from profitability, despite increasing stock prices).

2- Buying a stock before an earnings report

An earnings report is like a quarterly scorecard from a company. But before that scorecard is released, market analysts spend their days making predictions. Most companies meet or beat expectations. The mistake, then, is taking an earnings report too seriously because meeting or beating earnings just isn't news. So, if your strategy is to speculate based solely on earnings reports, you'll be basing your predictions on accounting tricks.

What to do instead: Earnings reports have their place, but you want to use them as a signal. What should you be looking for? The company that doesn't meet its earnings.

Why?

Well, it may be a good investment, depending on why it didn't make its earnings and what it can do to change that (you'll have to investigate). But in the meantime, the stock price has likely gone down, which means there could be an opportunity for you.

3- Buying into the hype

Remember Pets.com? It was pretty much the poster child for hype in a boom market. In fact, there was so much hype around Pets.com thatJeff Bezos (CEO of Amazon.com) later confessed that investing in that company was one of his biggest mistakes. But what happened to Jeff happened to a lot of guys: They got carried away by the hype (and by a stock price that grew in leaps and bounds daily). In the end, the company was worth nothing.

What to do instead: It's easy to tell you not to believe the hype. But that is, in essence, what a lot of guys should do. Few companies out there can live up to the hype, so you should take it with a grain of salt. When you see a rocketing stock price and all you hear is about this hot, new company, think to yourself that these are warning signs, notinvestment signs. Remember; living up to that kind of hype is a once-in-a-lifetime investment.

4- Assuming that if a stock price is low, it's good to buy

Buy low, sell high, right? Well, maybe. Just because a stock price is low, doesn't mean it's a good buy. And, conversely, just because the price is high, doesn't mean it's a bad buy. The mistake is not knowing that "buy low; sell high" is really shorthand for "buy stocks that are undervalued and sell stocks that are overvalued."

What to do instead: High and low are relative terms — $300 may seem like too much for a stock, whereas $3 might seem like a bargain. But you have to put the trade in context. Ask yourself if the company is under- or overvalued at its present price, based on market cap and P/E. That's the mark of 6- Blindly following the lead of an anchor investor

Sometimes it's easy to get the business page confused with the gossip column; after all, both do a ton of name dropping. A lot of guys make the mistake of following a big-name investor like Mark Cuban or Kirk Kerkorian.

The even bigger mistake is thinking that by copying them, you're guaranteed a payday. First, there are no guarantees. Second, even if they are right, they haven't told you their strategy, so you won't know when to sell.
What to do instead: You should follow what some of these investors are doing (if only because they have the capital to move markets). But by follow I mean pay attention to, not copy. In short, know everything you can, but think for yourself.

5- Not cashing out & locking in your profit

At some point, you need to take profits. But when you take profits (sell), it can make all the difference. The truth is that there is no easy answer for this. Sadly, a lot of guys get a gambler's mentality when it comes to profit taking. That's the mistake. Or, they see a little bit of profit, and hit the panic button and sell too soon. That too is a mistake.

What to do instead: Look at the profits (rate of return) that are common to the sector. The key is to be realistic. What you need to do is stay disciplined and not get greedy or scared. Plan your profit taking as carefully as you plan your investing.

6- Not cutting your losses

Stocks move up and down. But sometimes a stock suffers a steady decline. Surprisingly, some guys see that happening and they root for their stock like it's their favorite sports team. In other words, they become emotional. Day in and day out, they obsess over a declining stock price as they lose more and more money.

What to do instead: Short and sweet, sometimes you need to cut your losses. Success is a relative term when it comes to investing. Ideally, we think of success as how much you make. But sometimes success is about how little you lose. A smart investor not only knows when a stock is in a tailspin, he has the courage to let it go, so he can take his money elsewhere and start making it back.

7- Not doing your own research

Chances are that you have more than a few friends with their own ideas about investments. The mistake that most guys make is taking their friends' advice at face value. This isn't to say that you shouldn't trust your friends. They could be right. But copying them without questioning them is like giving away your money and hoping it comes back.

What to do instead: Find out where your friends get their information. If they have a broker that has made them a lot of money, ask for a referral. If they have their own strategy, ask them to teach you (it may not be the best strategy, but any worthwhile strategy should be able to hold up under the scrutiny of a student).

8- Gambling on penny stocks

With their low prices, penny stocks look like sexy investments. But there are two problems with such stocks. First, small prices typically mean smaller margins, so the transaction costs can eat you alive. Second, penny stocks are more susceptible to fraud and manipulation. While most penny stocks are legit, it's an area where crooks ply their trade.

What to do instead: Penny stocks aren't for green investors, despite their price. Why? Because to make money in penny stocks, you need resources. Furthermore, transaction fees are likely higher when you're trading a high amount of stocks. Investing always means doing research, but you won't read about penny stocks in the business section, so you'll need the resources to dig a little deeper.

9- Being afraid to invest during bad times

For the most part, the economy moves in cycles. Boom years are followed by bust years. While you can't seem to keep guys away from investing in boom years, it's like pulling teeth to find investors in the bust years. Of course, there are more bargain investments in leaner times, so staying out of the market in those years can be a big mistake.

What to do instead: Remember this rule: economic downturn is an investment opportunity. While that doesn't mean going all in when things turn south, it does mean that you should look at the market with a different eye. Don't be discouraged when things are tough, and don't follow the crowd.

10- Blindly following a broker

Do you have a friend who begins every sentence with, "my broker says..."? Well, so what? More than a few guys get burned by blindly following their broker's advice. Is he an expert? Yes. Does he have an agenda? Quite possibly. Does he have the power to predict the future? Of course not.

What to do instead: You should listen to your broker. But you should also question him. Remember; at his core, he's a salesman, so he's trying to sell you something. Press him on details. Why is this stock the next great stock? Did he invest his own money in it?

11- Not staying on top of your investments

Some guys spend months doing research, setting up a diverse portfolio only to make their initial buys and go to sleep at the wheel. It's puzzling, but it does happen. The trouble is that the market won't call you before things change. As a result, a lot of guys wake up one day to find themselves busted.

What to do instead: It depends on the type of guy you are. If the trouble is that you'd like to follow your investments but you just don't know how, you'll want to take advantage of the tools offered by your brokerage house. All brokers offer them and they work like household accounting programs. On the other hand, if you're just lazy (it happens), you probably shouldn't be so active in the market: look for mutual funds where you'll only have to review things on a quarterly basis.

12- Entirely selling a winner

When you make a profit, it's only natural to want to sell and take that profit elsewhere. Conversely, a lot of guys look at their losses and hold onto them hoping they'll get back to even. While those may seem like different problems, they have the same root cause: misallocating your money. While nothing is constant, the above strategy actually has you pulling away from winners and getting closer to losers, which doesn't make any sense.

What to do instead: It's okay to take a profit (in fact, it's smart). But unless you think the bottom is going to fall out on your stock, don't sell it all — hold on to some of the winner stock.

13- Trading too much

Being a trader or being active in the market doesn't mean making a ton of trades. But some guys make trades the way the rest of us order drinks (pretty much without thinking). While they may know what they're doing when it comes to the trade itself, what they're missing are the transaction costs. Each trade has a commission fee and each trade has tax implications. So, if your profit margin is slim, chances are it will evaporate with fees and taxes.

What to do instead: Never let fees and taxes dictate your trading moves. If you have to change your position, do it. But don't ignore fees and taxes, and don't get trade happy.

14- Assuming that if you like the product, the stock is good

How often have you and your friends enjoyed a product (like a Krispy Kreme donut) and said that you should own stock in the company? Well, some guys incorrectly assume that a great product equals a great stock. But the truth is that there's more to a good company than a good product.

What to do instead: Look at the product as a good starting point. Okay, you found the next big thing. Now do your homework. Learn everything you can about the company from its management team and its business plan to its stock performance. Then make your investment decision.

Make money by avoiding mistakes

In total, we discussed 16 common mistakes that investors make. Sadly, this is by no means an exhaustive list. The truth is that all guys make mistakes with their money. But what separates the winners from the losers are the guys who can apply what they've learned.

A mistake is bad in and of itself, but it is insurmountable if you don't learn anything from it, because you'll likely repeat it.

Multibagger stocks: Manage risks and reap rewards

Multibagger stocks: Manage risks and reap rewards

Courtesy : Economic Times

Multibagger stocks: Manage risks and reap rewards

Stock investing is inherently risky. Little wonder that it's not recommended for those who usually want to play it safe. Still there's no dearth of brave hearts who, in a bid to maximize gains, are always willing to take that 'extra' or even 'unlimited' risk.

After all, as the saying goes, there's no gain without pain. And there are stocks available for this breed of people as well. The 'only' catch is that if they can make one a millionaire, they can make one bankrupt too! But not everyone is scared, at least not the risk seekers. Even with all the risks and drawbacks involved in such stocks, many investors simply find the potential windfalls well worth it. If you too are unable to resist the lure of big money, you can also take a chance. However, it is better to know the tricks as well as the risks involved before putting your hard-earned money into high-risk stocks.

Things You Should Know

The first question before venturing into high-risk stocks should be directed at yourself. Do you have the knowledge, temperament and resources to let you start investing in such stocks without seriously damaging your financial future? And exactly how familiar are you with these stocks and the way this market works? .The golden rule of investing is never invest in anything you don't understand. So, if you don't understand high-risk stocks at deeper layers, never take the chance.You also need to figure out the amount of money you are willing to risk investing in such stocks. In fact, you should limit yourself to that amount, and not a single rupee more. That way, even if the worst happens, you may be poorer, but you won't be destitute.

Get a Fair Idea of High-Risk Stocks

If you still consider them worth the risk, you should have some idea about these stocks, which include penny stocks, turnaround stocks and concept stocks.

Penny Stocks are of a company whose business failed and which does not have a revival plan to make it economically viable again. Because of the continuous erosion of shareholders' wealth, these stocks trade at low prices -- typically, between Rs 1 and Rs 10. However, since their levels are quite low, they sometimes represent great money-making opportunities with limited risk.

Turnaround Stocks are of companies which are not performing well for various reasons, including adverse industry fortunes, higher debt and higher interest burdens, accumulated losses, inefficient management or uneconomical size. However, when these companies go through restructuring or they see a management change, they can offer turnaround possibilities.

Concept Stocks are of companies that are likely to create significant value for investors in the future. Usually concept stocks trade at very high multiples because there are great expectations built into the future prospects of these companies. Organized retail, branded jewellery, wind power energy, security and surveillance systems, logistics, outsourcing and oil drilling are all concepts that are likely to have great demand going ahead.

Risks Involved with Penny Stocks

Liquidity Risk: Usually the major ownership of penny stocks rests in the hands of a few people like promoters of the company. If these people decide to unload a significant number of the stocks, the price drops steeply. Also, since most of the trades are speculative and not really backed by fundamentals, the moment there is a market correction everyone wants to get rid of these stocks, resulting in huge price corrections.

Trick Trades: Going by the past experience, penny stocks' prices are sometimes rigged and artificially inflated. Investors get sucked in looking at the price movement only to suffer later as prices drop when the traders offload large quantities of shares.

Corporate Governance: Most of the penny/small stocks are poorly managed and governed. Some of them don't even send their annual reports to investors!

Risks Involved With Turnaround Stocks

For these stocks, the turnaround may not sustain, leading to losses.
"The risk in turnaround stocks arises when a restructuring plan has yet to take shape, and only ideas are floating around. Normally, only one of 10 such companies will be successfully restructured, while the rest will be liquidated. Additionally, such companies carry a very low net worth on their books, and provide little cushion to equity investors," Dinesh Thakkar, CMD at Angel Broking, said.

Investors' Profile

Usually, retail investors/day traders invest in penny stocks are.

"These investors are risk seekers as they want usually high returns and, hence, are attracted to penny stocks. Sometimes greed and ignorance are the only explanation for some of these investments," T Srikanth Bhagavat, Managing Director at Hexagon Capital Advisors Pvt Ltd, said.Like penny stocks, turnaround stocks also bring in multiple returns, but investors in these stocks are convinced about the future profitability and are looking for high returns accompanied by some risks.

The conceptual style of investing is good in any market circumstance. However, benefits become more obvious over a longer time cycle.Therefore, relatively long-term investors looking for extraordinary returns are interested in concept stocks. Once these stocks come into the limelight, they generate healthy returns," Ashish Kapur, CEO at Invest Shoppe, said.

Precautions while Investing in Penny Stocks

Anyone new to investing in penny stocks should first be made aware of the differences between these stocks and the more conventional bluechips and midcaps.

"Unlike buying shares in a large, stable company like Reliance and SBI, you are dealing with speculative investments. Penny stocks and junk scripts look attractive to the investor when the indices are rising since the price of these shares usually rise faster than  the rise in prices of other shares. However, when the market falls, the investor is left with junk, which has no value," Kapur warned.

As a matter of principle, you should invest in only those penny stocks whose fundamentals are known to you. Also be prepared to hold on to these stocks till the market discovers the hidden value in them. You also need to diversify and never put all you money into a single stock, no matter how sure you are.

Precautions in Turnaround/ Concept Stocks

Often turnaround players report bumper profits after a "sad" track record. It is pertinent to understand the driving factors behind the profits. A savvy investor typically chooses companies that have started making profit at an operational level due to operational efficiencies and changing business fortunes. The company is in the first stage of turning around, though it is still in losses at the net level. There is a high possibility that it would make it to the net earnings level soon.

"As far as concept stocks are concerned, investors need to be educated about the conceptual style investing, as it requires commitment for a longer time from the investors. Also you need to have the ability to spot emerging trends in the social and industrial environment," Kapur said.

Identifying Multibaggers

Identification of these stocks is also far more difficult than large, reliable stocks. Picking these stocks, therefore, requires detailed understanding of their business and a vision to anticipate the future for the companies' business. It may also require an eye to discover the hidden assets in a deeply-undervalued company.

For instance, turnaround stories can be identified by closely keeping a watch on the concerned company, following its policies, results and other business activities. A close interaction with management and understanding of their decision making is also necessary. But these stocks come into light only after some of the turnaround has already happened and there are some signs of changes. Also, in such cases, the net worth of the company is generally eroded, and, therefore, one should look at the replacement value of the company. "This can be done by studying the company's EV to sales and comparing it with the industry average," Thakkar said.

Have Patience/ Conviction

Invest in these stocks only if you are fully aware of the risks involved and also know the market well. Whatever be the case, investing in theme/concept stocks requires patience and conviction.

"Patience because the sector/company which has tremendous value may take time to be noticed by the market, and conviction because without thorough knowledge of underlying value in the stock you will not be able to hold the stock for the period long enough for full appreciation to be realized," Kapur said.

Conclusion

Sure, these big prizes also mean the investor needs to be resourceful, have an upper hand on the information flow connected with the stock, and that means investing some serious time as well. An upside is that there are professional services available nowadays that can help big players with these investments. They may be in the form of private equity investment vehicles or hedge funds, etc..