5 Golden Stock Rules for Market Newbies

Most of us will start earning now, sooner rather than later. Some in rupees, others in dollars. And just in case you, dear reader, are looking to invest in stocks and are new to it, here are the rules that govern the worlds of stocks. Presenting my (unsolicited) advise on trading. My '5 Golden Stock Rules for Market Newbies'.

Rule 1: Don't put all your eggs in one basket

The first and most fundamental rule. Don't put all your savings in a single stock. The risk is just too much. Diversification is the name of the game. Also, don't invest in different stocks of the same kind. For example, investing your money in 4 stocks like TCS, Infosys, Satyam and Wipro is not diversification. All of them are IT majors and so the odds are that they will move together. Instead choose from a variety of sectors like pharmacy, energy, auto ancillary, cement, sugar etc.

Rule 2: Gold glitters

Hedging your investments is extremely important. At times when the markets are experiencing sharp downs, you don't want your entire portfolio to sink. In such cases invest in oil shares like Aban Offshore. This stock normally rises when the oil price goes up and that's when the other stocks are hit.

Coming to gold, we Indians are obsessed with three things: snow, fair skin and gold. So the prices of gold never fall down drastically. And specially when the markets go down, gold prices always shoot up. So make gold a part of your portfolio. Please note that when I mean gold, I mean gold biscuits or gold coins. Don't let your mother or sister sweet talk you into buying gold jewelry. Their rationale will be 'ki investment bhi ho jayega aur hum bahar pehen bhi sakte hai.' Convincing as it may sound, it doesn't make good business sense because you lose a lot of your money on making charges.

Rule 3: To B or not to B

B, C and Z (that would rhyme if you are American) group shares, much like their movie counter parts provide cheap thrills. These shares shoot up only to fall back harder. So beware of them. They offer quick money, but if don't get out soon enough, you may burn your hands. These shares form about 10% of my portfolio. Ideally, you shouldn't hold such shares for more than a month. Invest, get a 15% return and move out. Don't get greedy.

Rule 4: A watched pot never boils

A common mistake made by market newbies is that they keep checking the worth of their portfolio every 10 minutes and get worried if they don't see significant improvements. Once you buy a stock, set a target, both in terms on time and value. When either of it is reached, get out.

Rule 5: Diamonds are forever. Stocks aren't diamonds

Lastly, never get emotionally attached to your stocks. I know this may sound silly to you, but it does happen plenty of times. Stocks that have performed very well for us, we tend to view favourably. We want to hold onto them forever.

I had this share Gujurat Mineral Development Cooperation (GMDC). Had bought it at 85. Shot up to 550 in 6 months. I was in love with the stock. Had even developed a soft corner for Gujaratis because of it. Then it started dropping. 500. 400. 350. I should have sold it. But I didn't. I hung on to it. I was going to be loyal to it, I decided. Guess what? It doesn't work that way! GMDC hit a low of 35! Last month I sold all my GMDC shares at 90. 2 whole years after I had purchased them at 85! Taking into account brokerage and tax, even a savings deposit in a bank would have yielded more! So remember selling at the right time is vital.

If I were to put down my experiences and the foolish mistakes I made in the stock market, a book wouldn't be enough. My initial investment of 100,000 (loaned to me) went up to 750,000 and then crashed to to 40,000! As I write this, I have stocks worth 55,000 after paying off my initial loan with interest! So I guess I am in a position to give you this gyaan.

Post Script: Article dedicated to Nishit Gogri, a good friend but a not so good stock advisor.