What are the rules of investing in the stock market crash for beginners?

August 30, 2020

Here are my 9 golden rules for investing in the stock market as a beginner (on or off market crash)

1. Study the Stock Market- Before starting anything of your interest, it is better to know how it works, the basic fundamentals related to it, what is your purpose of entering into such field?

When I started trading in stock market, I researched a lot, read many books for upgrading my financial knowledge and learnt how to technically analyse the stock movement and gain an understanding of order types, financial definitions and metrics, various kinds of investment accounts, timing of investment, methods of selecting stock, etc. There are plenty of online courses available which can guide you in the best possible manner from the scratch. Gaining a thorough understanding of the stock market will ensure that you’re in a good position to assess risks and make the right selection.

2. Invest in high quality companies- The companies which have high quality fundamentals and businesses are highly esteemed in the stock exchange market and tend to have a stable financial record and credibility. It is necessary to discuss in detail that why a novice trader or investor should avoid investing in penny stocks. Penny stocks are those stocks that trade at a very low market price, generally with a share price less than Rs 10. These stocks have a very low market capitalization and typically under Rs five hundred crores. Further, penny stocks in Indian stock market have low liquidity and are speculative in nature. Institutional investors avoid buying such stocks due to price manipulation and limited information availability about the company. However, I am not debarring anyone from investing in such stocks but a beginner should avoid stepping in such companies as an investor. If you are going to invest in penny stocks, do your research carefully and do not speculate about the stock. Because today's micro/small/mid cap may be a large cap company tomorrow.

On the other hand, the strong financial standing, excellent market valuation and credit worthiness act in favour of the investors and extend multiple benefits to them.

3. Avoid intraday and chose long term investment- You can make money even when the stock price is falling. In day trading you can sell the stock first and buy later (it’s called shorting a stock).

For example, if you predict that shares of Infosys will go down, then you can sell first at Rs. 597 and buy within the same day at Rs. 588, again making a profit of Rs. 9 per share.

This is what exactly people were doing (shorting) when the stock market crashed due to fear of COVID-19. People made tons of money and lost too by selling shares in the beginning and then buying later during the day when the prices have come down substantially. Just as day trading can be a great way to make money; it’s also an easy way to lose it. Don’t look at this as a gambling den where luck, hope and prayers can get you through. Intra-day trading is not an art, but a science. To succeed, you need to use the right tools and have a disciplined approach.

As an experienced trader, I would advise the beginners to invest for long term to get better results and meanwhile, you should invest time of at least 6 months in self improvement and acquiring knowledge about stock market. It’s no secret that stocks can earn phenomenal returns in the long term. Some of the shares in Warren Buffett’s portfolio were picked up almost 20-25 years ago.

Despite short-term pains, the crash is a good accumulation opportunity for long-term investors.

4. Don’t panic and stay invested- We should continue with our current investment plan. The only exception is when it’s clear that a company or niche industry isn’t going to recover, and then it may be time to cut those specific losses and sell shares of these companies. The stock market will always have turbulence, so it’s important that you ride out market cycles. If you are invested in high quality equities and your investments are based on a solid plan, don’t sell anything that you wouldn’t sell when there isn’t a crash. Equity investing means owning companies through listed shares, unless survival of businesses is being questioned, stay invested. Do your best to remain calm and remember that corrections and market downturns are normal and healthy. As an investor, you never want to make decisions based on emotions, especially fear, so first and foremost, try to remain calm

5. Be on a safer position and adopt Rupee Cost Averaging Formula- Rupee cost averaging is an approach in which you invest a fixed amount of money at regular intervals. This in turn ensures that you buy more shares of an investment when prices are low and less when they are high. By investing on a fixed schedule, you avoid the complex or even impossible duty of trying to figure out the exact best time to invest. The rupee cost averaging effect - averages out the costs of your units and hence lessens the results of short-term market fluctuation on your investments. You're never going to be able to time the market, so stick to a routine policy of regular share accumulation or liquidation.

6. Invest only the money you are willing to lose- You should never put all your savings on the stock market!

Before investing in the stock market, you must ask yourself the following question:

If you were to lose your entire stock market investment, would the consequences you face include severe financial hardship that would make it difficult to pay your expenses? If you answer yes, it’s not the right time to invest in the stock market – wait for better days for your personal finances.

Risk tolerance is how much of a loss you're prepared to handle within your portfolio. Investing without considering risk tolerance is like sleepwalking to the edge of a cliff. A market crash can be mentally devastating, particularly for the inexperienced investor. Panicking when your portfolio decreases drastically and selling is the worst thing to do. Avoid such a mistake by understanding how the market works and setting a personal risk tolerance.

7. Pay very close attention to fees- On paper, your returns for the year might seem impressive. Unfortunately, once you subtract all the fees paid to purchase and manage those investments, the yield starts to look less exciting. In fact, you could easily end up sacrificing 40 percent of your return to fees, according to Forbes.

Trade commissions, expense ratios, advisor fees – they all add up and take a big bite out of earnings. It pays, literally, to research the costs associated with all possible investments before making a final decision.

When calculating the profitability of your stock market investment, these fees are not to be neglected (just like the tax on financial transactions), because they systematically increase the cost of a stock you want to buy or sell.

8. Only invest in companies you know and understand- There are plenty of companies listed on the BSE and NSE, therefore, as a beginner, it is very difficult to chose the best among so much choices. The trick which I applied in my initial years of investing that I invested in those companies whose presence and growth can be detected in our surroundings. Likewise , you must have come across various outlets of Dominos Pizza and Dunkin Donuts across India and the craze among Indians for their pizzas. Hence, I invested in Jubilant Food works (Indian food delivery company based in Noida, Uttar Pradesh which holds the master franchise for Domino's Pizza in India, Nepal, Sri Lanka and Bangladesh, and also for Dunkin' Donuts in India).

Investing in the stock market is inherently risky! But the risk is even greater when you invest your money in a company you have never heard of or in a field you know nothing about.

At present, you can very well see that how Reliance is focusing on increasing its presence by means of Jio Mart(online grocery), Jio phones, Jio Sims, Jiofi etc. and hence, it’s easy to locate such companies, if we are aware what is happening in our surroundings and minutely analyse such changes

9. Understand the difference between cyclical and defensive stocks- This difference is important to know when identifying the companies in which you want to invest.

A cyclical stock corresponds to shares of companies whose financial results are very sensitive to economic fluctuations. This is usually the case for companies operating in the automotive, real estate, and major industrial and domestic equipment sectors. A defensive stock corresponds to shares of companies whose activities and profits are relatively unaffected by economic fluctuations, for example those providing basic services (water, electricity), food, and other basic products. The investor should be cautious before investing or trading in any stock. Just because a pattern has existed for years in the past doesn’t mean it will continue in the future, so seasonality should be just one of the things you consider in your fundamental research.

Once you have understood these differences, you can dig deeper by following economic and financial news articles as well as the annual reports of the companies.

These rules were followed by me when I was a beginner and these really helped in cutting my losses and acquiring new experiences. I would really like to give a valuable advice here as your friend that Never follow the herd community. Reading the Business section of newspapers in times of stock market turbulence is like talking to a wall – nothing will come out of that conversation. So stick to your fundamentals and miracle will definitely happen in long term.

DISCLAIMER: Stocks discussed in this article does not constitute as an investment advice.