Got Stuck? Try These Tips To Streamline Your Share Market Business
The movement of the stock market is cyclical and it’s an undeniable fact that it can’t continue trending only in one direction. The movement of the equity market can also be quite volatile and unpredictable. So it’s extremely important to protect your investments from the aftereffects of a sell-off in case of a market crash.
Here are some tips to streamline share market business:
1. Penny Stocks – These stocks look attractive price-wise as well as return wise, could become a burden if investors are not able to exit from them. Low liquidity makes it tough for investors to take an exit whenever they want. To address the issue, the Securities and Exchange Board of India (SEBI) plans to impose a limit on the minimum market capitalization for companies to remain listed to weed out so-called penny stocks.
2. Abundant knowledge of trading strategies – Trying to time the market and trade in and out of positions every day is a bad idea. If you are a conservative trader you shouldn’t liquidate 60% of the positions in your portfolio.
3. Price rigidity – Investors often set a benchmark price for the shares they hold. This benchmark is usually the purchase price but could also be the highest level touched by the stock. Future decisions on the stock are based on this price. In a falling market, anchoring to a price level can make investors hold on to stocks longer than they should. The share price may have dropped due to any reason but investors hold on because it is below the value to which they have anchored the investment. They cling on to hope that the price will revert to that level without assessing the fundamentals of the stock.
4. Buying more to average – If the stock you purchased drops, don’t try to buy more shares to bring down your average buying price. Investors often try to cover their losses by buying more of the same shares at a lower price. There is merit in averaging down the price provided the stock’s fundamentals are strong and the current drop is external to the company or owing to a temporary event. If your bet is right, the upside on the investment will be much higher.
5. Avoid Vindication on stocks – Stocks go into a tailspin, investors start devouring investment news and research reports. But they also seek information or signals which support their beliefs and tend to ignore matter that refutes their original thesis. This confirmation bias works overtime during a falling market. It can distort your judgment of the situation and lead you to make a poor decision.
6. Taking leveraged bets – Brokerage Houses encourage investors to take leveraged bets. Margin investing and leverage can yield high returns, but also lead to big losses. This version of investing should be avoided at all times and particularly when markets are volatile. Taking leverage requires that the investment earn a return at least equivalent to the rate of interest you are paying on the borrowed capital. But with the high degree of uncertainty in stock markets over a short-medium term period, the investment may work either way. It may also bring emotions into play—if you are playing with money you can’t afford to lose, you may panic easily when the market dips.
7. Keep your financial plan altered – A sharp fall in the market can lead investors in this alteration. Don’t base your investment decisions or position the portfolio on prevailing market mood. The future course of the market may work out completely different. At such times investors tend to forget asset allocation and lose patience. This can hamper wealth creation in the long term. Instead of making knee-jerk changes in the strategy, it makes sense to focus on the long-term objectives and stick diligently to a well-defined financial roadmap.
8. Over-diversify the stocks portfolio – Mutual Funds diversify to reduce the risk, but individual investors usually bet big on a few stocks. Such focused exposure can hurt when the tide turns. At the same time, too much diversification is also not good. Some investors may try to reduce the risk by spreading their money across several sectors or even multiple companies within a sector at once. Diversification is essential but beyond a point, it will not lessen the risk further.
9. Invest in defensive stocks – These stocks are typically considered to be safe bets and are the least affected during a market crash. Their valuations don’t take a major hit even when the market is under a deep sell-off mode. So, investing in defensive stocks is one of the most popular strategies to prevent the stock market crash from affecting your investment portfolio. Since companies produce goods or render services that are almost always in demand, they tend to be profitable and financially sound even during economic hardships.
10. Set stop-loss targets – It is an effective tool that can help limit your losses when your investment decisions don’t go according to plan. It ensures that your losses don’t go below a certain level. Whenever you buy the stock of a company, always ensure to set stop-lossless target immediately. This will allow you to reduce your capital loss in the event of a down slide in the stock price as a result of a market crash.