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Why must one be careful while investing in the stock market?

By - Research Team    |    Updated On 19 September 2015 |    Financial Planning

Why must one be careful while investing in the stock market?










There is a famous saying “Fools rush in where angels fear to tread”. What does one learn from this saying? Stock markets certainly need to be approached with caution. Most of the time the voice of reason is drowned by the roar of the bull and one jumps in the markets without even knowing what he is doing. Bull markets cause one to do strange things. One must have heard the phrase “Like a bull in a China shop”. What does this phrase mean? Rushing in blindly and destroying everything would be an apt description. This rush of blood to the head causes one to make wrong decisions which would cause him to regret for many years. Act in haste and repent at leisure is the saying apt in such circumstances.

Never forget the basics




Walking in blindfold into a retail store and randomly picking up articles from the shelf. Is this the way one shops? One would be called a fool if he were to do so. But one does this often while investing in the stock market .Picking up shares without checking their fundamentals is a cardinal sin.

  • One must always read up the Company he plans to invest in. What is their line of business and what products they sell? Is there a good demand and a market for their product? Do they have the necessary infrastructure and are they able to supply the product to match the demand?

  • How long has the Company been in business? Does it have a good track record?

  • How do the promoters manage the business? Does it have good Corporate Governance policies?

  • Never believe mere speeches of the promoters or get caught in the hype. One must always test the waters before jumping in.

  • There is a famous saying “ Never invest in anything which cannot be illustrated with a crayon. One must never invest in a business the dynamics of which he cannot understand.

Are penny stocks a good pick?

 Buy cheap stocks…Accumulate large quantities…When the market rises make a killing. Isn’t it easy for a share which is INR 5 to become INR 10 rather than for a share which is INR 2000 to become INR 4000.One can accumulate shares of Companies which are a few rupees purchasing them in the thousands wait for its price to double and sell it for a huge profit? Isn’t this a great strategy?

  • Remember a stock is valued on its fundamentals. Isn’t it better to buy a single pair of shoes of a well renowned brand rather than a few hundred pairs of shoes from the roadside stall which might last but a few days?

  • Why is a share cheap? A Company might be in huge debt or suffer from regulatory issues which are reflected in its price. If one does not check the fundamentals and purchases such stocks in a hurry he is left with these stocks for long periods of time and might eventually have to sell them for a loss. One must always differentiate between a cheap stock and a value stock.

  • One must always buy shares of good blue chip Companies even though they may be pricey especially of those which have very good fundamentals. One’s investment is safe and blue chips generally rise in a bull market and hold their own in a bear market.

  • One might not be able to purchase many such shares but one can accumulate them little by little until one has sizeable quantities of such shares in his portfolio.

Emotions in decision making

One might purchase shares of a good blue chip stock and when it rises by a few hundred cash in and make a profit. One might also have shares in one’s portfolio which have been static for a few years or even gone down in value.

  • One might have emotions towards certain stocks and might not be willing to sell them even if one is bearing a huge loss on these stocks. These might be stocks related to the industry which one works in.

  • One resorts to averaging or increasing one’s holdings in these stocks as the price steadily falls and resolves to hold on to these stocks as long as it takes for them to rise.

  • One books a small profit on good fundamentally strong stocks exiting them at a time one should be holding them preferably with a three year time horizon and losing on high gains.

  • One holds low performing stocks for long periods of time at a loss due to emotion. One must set a stop loss around 10% where if the stock price falls to this level one’s broker sells these stocks and limits the loss to only 10%.One can then spot rising shares or value stocks and invest in them with these amounts.

Stock market runs on the news

The stock market is all about news .The stock market is fueled and runs on the news. But should one buy shares on the news? A hot tip from a friend or a broker must be taken with a pinch of salt. Remember by the time one hears the new and decides to purchase the share the news is already factored in its price and one buys shares at elevated levels.

  • One must buy on the rumor and sell on the news. This is rarely followed Remember it is obvious that institutional investors and venture capitalists would already be in the know and purchasing shares at elevated levels only results in giving them a profit.

  • One must remember that many a time market jabber sends shares way in excess of their value or book value or networth. The market values shares on news .A Company is rumored to get a high value project. Its share price races ahead of its fundamentals .Its prices reach elevated levels and one purchases these shares .If this rumor turns out to be false one’s losses are huge as everyone races for the exit. In any case one would enter after the news is factored in the share price and serves no benefit as by the time one invests it is common knowledge.

  • In the words of Warren Buffett “ Be fearful when others are greedy and greedy when others are fearful”. Remember the stock markets cannot rise forever or be forever in the dumps. One needs to be opportunistic and pick up value stocks and blue chip stocks when all looks to be going against them. Remember when everything seems to be going against you the airplane takes off against the wind.

There is a famous saying “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” In difficult times in the stock market this saying comes to mind.


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