Many feel there is no sense to the way the market works. However, understanding the science of equity investing will make you realise that there are some simple rules dictating the market. View the presentation to know more.
5 Principles to Understand the Science of Equity Investing
5Principles to Understand the
Science of Equity Investing
Investing in the Stock Market
Stock market investing is considered one big gamble. It is considered
highly risky, volatile and complex, and thus, not everyone’s ball game.
Many feel there is no sense to the way the market works. However,
understanding the science of equity investing will make you realise
that there are some simple rules dictating the market. Here are five
Buy at lows, sell at highs
This is the core stock market principle. You will make money only
and only if you buy at a low price and sell at a higher price. The
difference is the profit that you pocket.
So, if you are looking to enter the market, don’t cheer when the market
is up. Similarly, if the market is falling, don’t fret.
Your opportunity lies in a falling market.
This is the time to buy stocks that may be cheaply available. If you are
already invested and are looking to sell, then a bull market is the best
It’s all about timing
When you invest in the stock market, you will
ideally be looking to accumulate stocks of good
companies. These companies will then bear fruits
in the long term. However, simply buying a good
company’s stock is not enough.
You need to get the timing right.
This ensures you get the best – and lowest –
It’s all about timing (Contd.)
Similarly, you need to sell at the right time to maximize your profits. So,
you need to be patient and wait for the right time to buy or sell. Just
because the market has risen does not mean it will not continue to rise.
So, if you sold just when a market uptrend has started, you would
lose out on profits.
Similarly, if you buy just when a market downtrend is setting in, you
would miss buying at lower prices. Patience is key. Knee-jerk reactions
should be avoided.
History always repeats itself
"The four most dangerous words in investing are: 'this time it's
different.’” Sir John Templeton had famously said. He was one of the
biggest names in the investment circles.
In the stock market, don’t blindly invest.
Look at the past trends in the stock. These could help you identify the
cheapest price to buy and the highest price to sell. Don’t get carried
away with the market sentiment.
Here’s an Example-
If you decide to buy a stock once you deem the company to be
valuable, and log into your trading account. Fortunately, the market has
fallen that day, and you decide to buy. Wait! Check what has been the
lowest price in the near-term. Historical low and high prices often act as
key levels. Technical analysts call these support and resistant levels.
They are important. It may be worthwhile to wait and let your stock
touch these levels before buying or selling.
#4 If the company succeeds,
so will your stock but not
in the short-term
If the company succeeds, so will
your stock but not in the short-term
As we said earlier, the idea of stock market investing is to pick stocks
that are likely to give you the best profits in the future. However-
Patience is of great essence.
Any company, no matter how good, will take time to succeed. So, the
stock will also take time to give you returns. This is because the market
goes through cycles.
Short Term Vs. Long Term
Stocks will rise and fall in the short term irrespective of their
inherent value. How much they rise or fall depends on the market
sentiment. However, in the long term, the stock will rise if the company
is valuable. This is because the company would have proven to bear
fruits. So, the stock becomes more valuable.
Ideas can be profitable
There are two parts of the stock market – primary and secondary.
The secondary market is where stocks are traded. The primary market
is where a new company gets listed on the exchange. At this stage, it
may often be a very small company.
As an investor, you will basically be betting on the
profitability of the idea and the business model, than
the company itself.
Yet, this can be very profitable.
Here’s an Example-
Infosys offered shares for Rs 98 during its Initial Public Offer (IPO) in
1993. Today, they are worth Rs 3600. If you had bought 1000 shares
during its IPO for Rs 98,000, they would now be worth Rs 36,00,000.
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