Investing in stocks is never easy. Yes, investors have made a lot of money in stocks, but many investors do lose a lot of money in stocks, too. I'm sure the most important thing for you is not to lose money, when investing in stocks. In this article, you will learn 4 ways to avoid losing money in stocks.
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Investing in stocks is like running a Marathon and not the 100 Meter dash. If you want to make money overnight, look elsewhere. The stock market is not for you. Success in the stock market involves careful planning and control over your emotions.
1. Understand the stock market before investing
The biggest enemy of stock markets is inflation. As the prices of goods and services rise, GDP slows. Banks offer higher rates on FDs.
Soon, stock markets fall. Retail inflation measured by the Consumer Price Index (CPI), was very high for the month of December at 5.2%. SBI has increased FD rates. Other banks could follow.
Wait for a correction in the stock market, before investing your hard-earned money. If stock markets crash, don't panic and sell stocks. Stay invested and wait for the stock market to rebound.
Do look at the stocks past performance, but never buy just because of it. Never forget to look at the P/E Ratio (Price to Earnings Ratio), before investing in stocks.The P/E Ratio tells you how expensive or cheap a stock really is vis-a-vis its peers. P/E Ratio is the ratio of the market price per share to the earnings per share.
A high P/E Ratio means a stock is too expensive and a low P/E Ratio tells you a stock is a cheap buy. But do remember this.
Stocks with a high P/E Ratio may create value and give good profits if the Company is reputed. You get good returns from these stocks. A stock might have low P/E because of management issues and low profits. Avoid these stocks.
3. Avoid the herd mentality
Herd mentality is you follow the crowd, without doing your research and studying the fundamentals of stocks. Do you remember the Dot Com boom of the late 1990s? This was a speculative investment bubble that formed around internet Companies between 1995 and 2000.
Investors poured money into internet Dot Com Companies, without checking the fundamentals. Many investors afraid that they would miss out on an excellent opportunity, poured money into Dot Com Companies, with poor fundamentals. When the crash came, investors who followed the herd, lost a lot of money.
You must have heard the saying, Never put all your eggs in a single basket. Investing in stocks across sectors, protects your investment. But, over-diversification is a bad idea. Having too many stocks in your portfolio, does not give much value. It could even deprive you of good profits from your investment. Be Wise, Get Rich.
Mr. C S Sudheer is the founder and CEO of IndianMoney.com – India’s largest Financial Education Company. He started his career with ICICI Prudential Life Insurance and later on worked with Howden India. After his brief stint in Howden India, he moved on and incorporated Suvision Holdings Pvt Ltd which is the sole promoter of IndianMoney.com. He aims to build a nation that is financially literate with investment savvy citizens.
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