Every investor at some time of their life has made a loss on some or all of their stock market investments. Some have lost big and have left the markets completely, vowing never to invest again. Some have lost some money, learned from their experience and have continued to invest with mixed results.
Risk is inherent to any investment—risk is a natural phenomenon of life. And risk is directly related to returns—higher the returns you expect, greater the risk you have to take. Investments in shares and stocks are entirely based on this theme.
Direct investment in stock market has more risk, and certainly far better returns than investment through mutual funds, which try to reduce risk by spreading their portfolio to 50-60 stocks, but give out only average returns on your investments.
Though it is not possible to completely remove risk from your investments, you can reduce it gradually and substantially to make it almost negligible and generate highest possible returns from direct equity investment. Here are the 3 simple steps to follow:
Choose a Good Share Broker
Most investors choose share brokers like they choose mobile companies—the cheaper, the better. If you know investing, can do individual stock research, can track stock prices and monitor your portfolio regularly, choose any cheap online broker. It doesn’t matter.
But if you want guidance, regular investment advice and information updates, you should choose a local branch of a broker having at least one NISM qualified Equity Research Analyst. Such brokers charge a bit higher brokerage but then, do you visit a Doctor, a CA or a Lawyer based on their fees or on the quality of advice they give?
Like a doctor, a CA or a lawyer, a share broker is also a professional. Don’t choose a broker because he does a lot of advertising or has too many branches in the city. Make sure that you open your account with a branch having qualified and trained staff.
Choose Good Quality Stocks
Do you buy fresh vegetables for your home or the rotten ones? Do you buy fresh ripe fruits or the cheap stinky ones? Do you buy your clothes from roadside or street shops or from large stores or malls?
If you like everything good, fresh, healthy and trendy in life, who do you buy only cheap, falling stocks? Most investors have a bad habit of catching falling knives: Share price of P C Jewellers has come down from 450 to 250, buy it; it has further come down from 250 to 150, buy more; it has again fallen from 150 to 100, buy even more!
Just like you choose best veggies and fruits for your kitchen, best clothes for your wardrobe, choose good quality shares for your portfolio. Ask your broker or do some home research, and buy only the best companies within a sector or industry.
Get some Quant Help
This part is a bit tricky. Quant is short for Quantitative Analysis.
These quantitative analysts use complex algorithms, historical price charts, current market trends and lots of other data on their computers to generate Buy, Sell or Hold calls for individual stocks.
Even before a stock starts rising big time, a quant can alert you to buy and hold it. Even before a stock goes bad and starts falling big time, a quant can warn you to sell it and exit completely. In fact, a quant can help you save a lot of money on bad stocks and generate a lot of money for you on good stocks.
The tricky part is to find a good quant or a broker who uses quant techniques to give investment advice. Standalone quants are expensive and actually a very few brokers are using them.
If you find one, or your broker is using one, then you must be a very lucky investor!
Happy Investing!
Invest More, Invest Better!