In recent months, the entry of new investors in the stock market has been trending and no wonder the NEPSE index is making higher highs and breaking records with every other run and minor correction. Moreover, I have also been reading that one of the reasons for record-breaking intraday turnover is because banks are slashing interest rates every month. As a result, people have switched their investments from BFIs to the capital market.
It is known that people are getting involved in the capital market by applying for IPOs or trading directly in the secondary market which is a very positive thing and massive progress for the ‘Nepalese Capital Market’. However, even after knowing such impressive facts about the current market, there is always some kind of uncertainty and a big risk of getting your capital swiped away. If certain precautions are not taken, one can suffer big financial loss and psychological trauma.
Some of the crucial investment advice includes "Buy the sector or companies who are leading the market technically and fundamentally without being impacted by any other factors." Factors can be anything from political instability, tips, rumors, to a bearish trend.
What can we do to minimize our risk of getting stuck in the market? Here I have tried putting certain strategies that can help investors to sustain themselves in the market and carry out profitable trades.
Sell Weaker Stocks
There is no guarantee that a stock will rebound after a protracted decline, and it’s important to be realistic about the prospect of poorly-performing investments. And even though acknowledging losing stocks can psychologically signal failure, there is no shame in recognizing mistakes and selling off investments to stem the further loss. In both scenarios, it is critical to judge companies on their merits, to determine whether a price justifies future potential.
Believe in the Future
Rather than panic over an investment’s short-term movements, it is better to track its big-picture trajectory. Have confidence in an investment’s larger story, and don’t be swayed by short-term volatility. Don't overemphasize the few cents difference you might save from using a limit versus market order. Sure, active traders use minute-to-minute fluctuations to lock in gains. But long-term investors succeed based on periods lasting years or more. Investing requires making informed decisions based on things that have yet to happen. Past data can indicate things to come, but it’s never guaranteed. It’s important to invest based on future potential versus past performance.
Avoid "Tips" Tips
Regardless of the source, never accept a stock tip as valid. Always do your own analysis on a company before investing your hard-earned money. Tips do sometimes pan out, depending upon the reliability of the source, but long-term success demands deep-dive research.
Stick with One Strategy
There are many ways to pick stocks, and it’s important to stick with a single philosophy. Vacillating between different approaches effectively makes you a market timer, which is dangerous territory. Consider how noted investor Warren Buffett stuck to his value-oriented strategy and steered clear of the dotcom boom of the late '90s—consequently avoiding major losses when tech startups crashed.
Investors often place great importance on price-earnings ratios, but placing too much emphasis on a single metric is ill-advised. P/E ratios are best used in conjunction with other analytical processes. Therefore a low P/E ratio doesn't necessarily mean a security is undervalued, nor does a high P/E ratio necessarily mean a company is overvalued.
Many great companies are household names, but many good investments lack brand awareness. Furthermore, thousands of smaller companies have the potential to become the blue-chip names of tomorrow. This is not to suggest that you should devote your entire portfolio to small-cap stocks. Cheaper stocks are likely riskier than higher-priced stocks because they tend to be less regulated and often see much more volatility.
Article by Avinaya Silwal