5 tips to tread safely in stock markets

The most fool-proof way to steer clear of the scams related to stock markets is never to lower your guard. Never lend an ear to people who accost you with a claim that they are experts in when to sell and when to buy. Don’t rely on tips while you invest. You have to decide for yourself when to sell and when to buy.

Always expect volatility and losses in markets in the short term. Do not borrow to invest in stock markets. Invest long term.

1. How many stocks are good to have a diverse portfolio?

Many retail investors hold too many stocks in a bid to have a diverse portfolio. I recently met a small player with 152 stocks in possession. Most of them were low-quality small stocks and penny stocks bought many years ago on the basis of advice from friends and traders. About 25 stocks make up an ideal portfolio. Pick quality stocks from various sectors. Mutual funds are a great way to invest in small and medium stocks.

2. Is it a wise thing to take up trading as a profession?

Many youngsters who had lost their jobs due to the COVID-19 lockdown have turned to stock trading. They have to bear in mind that successful trading takes a lot of expertise. Only a handful of traders who strictly abide by the stop-loss rule have made it through the stock markets. Think twice before venturing into stock trading professionally. Discipline and stock analysis are integral to success in this sector.

3. Is it better to invest directly in markets rather than buying into mutual funds?

It takes a lot of expertise and time to invest directly in markets. If you have such skills you can invest directly. Or you can invest through mutual funds. Investing through SIPs with a long-term plan is a good idea. A successful trader has to continuously evaluate his stocks and make changes accordingly.

4. Isn’t it better to buy cheaper stocks?

This is a common mistake done by small-time investors. They follow penny stocks and end up losing money. Not all good stocks are cheap and not all cheap stocks are good. Some cheaper stocks may help investors reap rich sometimes. But this is not a stable way to make money. It is better to buy quality stocks and hold on to them for quite some time if you want to make money.

5. Can expatriates invest or trade in India?

Expatriates can open demat and trading accounts. They can do so after getting the nod from the Reserve Bank of India and through portfolio investment services. However, they are not allowed to day-trade.

(The writer is the chief investment strategist at Geojit Financial Services.)