Rules to Enter and Exit The Stock Market

By Vikram 17 Comments 26 Dec 2018
An Introduction

An Introduction

Stock Investment is very risky in nature. You can do infinite no of analysis before Stock Investment. A set of investors vouch for fundamental analysis and others bet for technical analysis.
The stock investment is not only about cherry picking individual stocks. An investor also needs to gauge the broad/macro level sentiments. If you are riding against the sentiments then you will bound to lose. An investor should always ride with the tide. Losers swim against the tide. An investor should not be over optimistic. This is especially true for stock investment. We are not saying that stock investment opportunities are not there during adverse times. The point is that as retail investors, Its not about competent enough to identify those opportunities. In short, You will enter the stock market when the tide is favorable. When it will turn against then wind up and Quit the market. Lastly, an investment decision should not be based on a single factor but a mix of factors. This post will discuss some of these factors, that found having a strong correlation with the market movement. This is based on a study of successful investors.

These are some important rules which you have to follow to enter and exit the stock market for better returns :–

  • A general trend that one observes in the equity market is when share prices start falling, many investors, especially in the retail segment, follow a wait-and-watch policy to enter the market. They try to look beyond at the reversal of the ongoing trend.

  • However, by the time they react, equity markets usually move up substantially. By then they find the market overheated and either stay out and wait for the next correction to participate or are left with no option but to invest money at those levels.

  • As it is sometimes difficult for investors to calculate the reversal in trends at its early stage, most enter when the markets have run up significantly, SundayET guides you in finding stocks where a decent upside is left in a market which has appreciated sharply.

  • According to Ashish Kapur, CEO of Invest Shoppe India, there are always good investment ideas available. One just needs to search them out. One should invest in stocks which are available at attractive valuations and have good growth prospects. In fact, it is good to be a contrarian and look for sound companies in which the general view is negative.

  • A few parameters remain constant to find good stocks such as kind of business, quality of management and revenue visibility. Vipul Sanghvi, president (institutional sales), Religare Capital Markets, suggests that investors should go with a business, which is easy to understand. Also, there has to be a clear revenue visibility for the next 2-3 years.

  • In a market which has already gone up to some extent, it is the valuation that becomes the deciding factor apart from the factors mentioned above. Every thing has a fair price. A stock might be fundamentally strong but high stock prices can make it unattractive.

  • According to Sanghvi, valuation plays a vital role, especially when one invests money for short to medium term. However, for different sectoral companies, one should use different measures to see the relative valuation. For instance, for banks and other financial institutions, one should use price to book value ratio, whereas, for manufacturing companies one can judge through replacement cost. Land bank and their market value could be factored in to take a call on a real estate company.

  • According to D K Aggarwal, MD, SMC Wealth Management, while the economy and markets have shown improvement there is still some scepticism about the markets in the near term in the absence of any major trigger to provide impetus to the market. Hence investors should do some research before putting in money.

  • Aggarwal suggests that they should do their analysis on last quarter results of India Inc as it brought up interesting trends. Many sectors showed higher capacity utilisation and higher returns on capital. Therefore, a top-down approach can be adopted to identify the sectors and stocks that will perform well in the next 1-2 years. He is bullish on auto, FMCG and capital goods sector.

  • Since the stock markets are influenced by a variety of factors it is advisable to seek advice from experts having knowledge and experience of investing in the markets, especially when markets have gone up by some extent.

  • Nevertheless, one can make money in equity market even if he/she is not very sound in the techniques. According to Kapur, following the twenty-twenty rule and being greedy when others are fearful, and fearful when others are greedy one can get decent returns without any stock selection and great market timing skills.

  • The underlying logic of the twenty-twenty rule is that in a bear market one reaches a point of extreme pessimism when everyone is fearful and feels reluctant to buy. Similarly, when the going is good, it is difficult to sell, as one is confident of more upside. But a savvy investor argues that in a bearish phase, if there is no downside left there would be no seller left and it would be impossible to buy.

  • Hence after buying, one should be prepared for some more downside in the short term. Likewise, in a bull market, investors should not wait for the market to touch its peak to sell holdings rather they should be prepared to offer the balance upside potential to other investors.

  • This rule is based on the movement of the Sensex for the last two decades. While analysing the movement of the Sensex for the last 20 years, it has been found that it goes up and down by at least 50% every two years. In fact, in the last five years it has gone up or down by at least 50% every year.

  • Hence, based on the past charts, each time you were to buy in a bear market, wait for the market to go down by around 20%. Similarly, sell when the markets appreciate by around 20%. However, one must not panic or become greedy on seeing further downside or upside movement of the market.

  • Also, one must remember that while in the long run market price reflects the fundamentals of the company, in short to medium term, sentiments drive the markets to a large extent. Hence, investors taking short to medium term of investment horizon in a market which has already run up substantially, should invest only spare money.

What is The Right Time to Enter / Buy a Stock?

Right Time to Enter / Buy a Stock

When to buy and sell stocks. The best time to invest depends on you understanding the value of what you buy.
For you to make money any profitable investment has to increase in value somehow. If you buy a stock for $1 and sell it for $2, you’ve made money. Sell it for more than you paid for it to make a profit. Simple, right? Yes, but the details of making money in the market aren’t easy.

To make a reliable profit from investing, you must understand what a stock is worth and what other people are willing to pay for it. Only then can you evaluate any specific opportunity. Is now a good time to invest? If you’ve found a good opportunity, the answer is always yes!

It’s not surprising that first-time investors often worry about the timing of their initial stock purchases. Getting started at the wrong point in the market’s ups and downs can leave you staring at big losses right off the bat.

But take heart, Fools: Whenever you first invest, time is on your side. Over the long haul, the compounding returns of a well-chosen investment will add up nicely, whatever the market happens to be doing when you buy your first shares.

Rather than fretting about when you should make that first stock purchase, think instead about how long you’re planning to keep money in the market. Different investments offer varying degrees of risk and return, and each is best suited for a different investing time frame.

In general, bonds offer smaller, more dependable returns for investors with shorter time frames. According to Ibbotson, short-term U.S. Treasury bills yielded roughly 3.7% per year from 1926 to 2003. (We picked 2003 as an endpoint because it was right after the end of a bear market.) While this seems relatively meager, remember that inflation was nonexistent for most of this period, making a 3.7% average annual return fairly attractive until the 1960s.

Longer-term government bonds have provided slightly higher returns: an average of 5.4% annually from 1926 to 2003. Surprisingly, their gains have been relatively volatile. In the 1980s, for instance, they returned nearly 14% annually, but in the 1950s, bonds lost an average of nearly 4% per year.

Stocks have also been very good to investors. Overall, large-cap stocks have returned an average of 10.4% per year from 1926 to 2003 — quite a bit higher than bonds. Surprisingly, the range of the returns for stocks is not that much larger than the range for bonds over the same period. Stocks suffered a slight decline in the 1930s, but enjoyed several particularly strong decades as well, including the 1950s (18% average annual return), the 1980s (16.6%), and the 1990s (17.3%).

What is The Right Time to Exit a Stock

Right Time to Exit a Stock

What is the Right Time to Exit a Stock? When should you sell the stocks and book profit? This is one of the most important questions which come to every beginner who enters the stock market.

Do you remember the story of the brave Abhimanyu from Mahabharata. He went through a fatal end just because he knew how to enter a ‘chakravyuh’ but didn’t know how to exit.

Similarly, the selling time of a stock is as important as the entry time. Therefore, in this post, I am going to explain the exit strategy for an intelligent investor. Be with me for the next 5-6 minutes to learn the right time to exit a stock for maximum returns.

Imagine a Scenario

You bought 20 stocks of a company at price Rs 500 today. Further, let’s also assume that you have done a good research and the stock is fundamentally very strong.

Next morning, the stock price zooms to Rs 550 (+10%). What will you do? Will you sell the stock and exit?

Now, let’s move to two days hence. The stock price now rose to Rs 590 (+8%). What will be your next move?

When prices of the stock rise like this, the ‘greed and fear’ becomes in-charge of your actions. Here, you might think that let’s book the profit. You have already gained Rs 90 per share (+18%). What if the stock prices fell tomorrow? It’s better to book some profits right now and you will enter again in the stock when the price is low.

But, while doing so you are missing out few points. Let me highlight them:

You have researched the stock carefully and the stock has a potential to give huge returns. It might become a multi-bagger in the future. Why do you want to book a profit of +18%, when you can get +1000% profits?

You might also be thinking that you will enter the stock again when the price is low. What if the stock price never comes down? I mean, the company is fundamentally strong and might give brilliant results in future. There are a number of stocks whose price has never fallen much and hence has never given the buyers a better opportunity to buy again. Why do you want to jump from the running train and want to catch it again?

Let’s imagine the scenario that you re-entered the stock. Do you know in such scenario you have to give the extra brokerage charge and other charges (almost 4 times)? That mean, you have to pay all the charges 2 times when you first bought and sold the stock. And next 2 times, when you re-enter and will sell in future. Total 4 times brokerage. Do you really think it’s worth paying 4 times the brokerage just to book a profit of +18%?

Lastly, do you know that you have to pay a capital gain tax of +15% for short-term gains?For long-term investment (over 1 year), the capital gain tax is nil 10% (Since April 1, 2018).

Overall, it’s not logical to sell the stocks if fundamentals are strong just to book some short-term profit. Look at the bigger picture. Haven’t you ever wondered why the great investor’s like Warren Buffet, Rakesh Jhunjhunwala, RK Damani etc always invest for a long term? How will you get a multi-bagger stock if you never gave your stock the opportunity to grow?

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