Tuesday, August 30, 2011

Stock Investing Rules

Stock Investing Rule One: Buy when others are selling and sell when others are buying

Consciously or unconsciously, almost all investors knows this stock investing rule. But in practice majority of investors this basic stock investing rule. When people are on buying spree, the price of the stock is bound to go up, never buy in this circumstances. When people are panicky and on selling fit, the price of stock is bound to fall dramatically. This is the best time when some quality stocks will be available at discounted price. Always remember to buy ‘quality stocks’ in this situation quality stocks tends to gain back its peak at an amazing pace.

As soon as the stock gains back its peak sell and make profit. Hold this money (profit) and wait for another price fall. It may look too simple but this the stock investing rule that no other rule can ever beat.

Lars Tvede, the author of “Psychology of Finance”, says that this is the first stock investing rule. In theory, almost all investors know that this rule is true, and this is also proved by statistical studies. But then when it comes to act accordingly, this stock investing rule is the first to get neglected. Many investors only buy stocks that have already risen, or enter the market when the prices have already peaked. These investors buy stocks when driven by their friend, newspapers, TV.

But the point to understand that by the time the news about the stocks gets broadcasted, the prices have already peaked and it becomes the good time to sell and not to buy. A similar drama is played when it comes the time to sell. People start selling when the same newspapers and TV’s starts airing the news about the catastrophic stock market conditions. If the stock market is in catastrophe it means this is the best time to start accumulating quality stocks as prices have already bottomed.

Anyone who is following the stock markets for a while, must have realized how analysts, economists, financial advisers and journalists who make predictions on the financial markets are always behind the market. This is not only true for these analysts but also in our news, and stock forecasting agencies.

Actually the only thing these people are doing is are reality mere post-mortem of what the market had already figured out long ago. In other words, the market is always smarter than you and it always outsmarts your. So this first stock investing rule will ask you to learn to stay ahead of the market. Staying ahead means, one should know when is the right time to buy and sell. Buy when others are selling and sell when others are buying

The explanation to this faltering of this very first stock investing rule is very simple. Our analysts and value investors are very smart. When it’s the time to buy they actually create an environment of panicky, so that people like you and me start selling stocks at very low prices. The same stock that we are selling then are accumulated by these investors.

Generally these investors are ones who accumulate huge quantity of stocks. So when they have accumulated enough shares to satisfy their needs they start spreading that now the market is showing signs of revival and people must buy stocks. Hearing these suggestions, people start buying and soon the bull market starts. In this bull run when the price peaks, the same smart analysts and value investors sells their holdings and make amazing profits.

Stock Investing Rule Two: Never invest in stock market with fear and greed

Our own fear, greed and lack of know-how actually makes us loose lot of money in stock market. How many times have you worked in the market in a non-rational way? We often act in stock market based on emotional impulses of “greed and fear”, or incorrect information. There are people who simple has bought and sold a share because others are doing the same. This is not the way one should invest in shares. Markets can sometimes trick you very badly. It is not difficult to recognize this trick but people choose to be ignorant and un knowledgeable.

People find it much easier to ‘trade in shares’ than to ‘invest in shares’. Trading in shares is very easy, it is almost a no brain job, but low and sell high. But the problem is that you will never know that when the stocks prices will fall and rise. The market is very volatile and unpredictable.

This is the reason why stock investing rule two tells you to keep aside your fear, greed and start thinking logically. Apply the stock investing rule in all situations. Ask yourself this question that whether this stock is overvalued or undervalued and if the answer is ‘undervalued’ only then you buy this stock.
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