Six Rules For Investing In Stock Market
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Six Rules For Investing In Stock Market
Sometimes funny things happen in Stock market. Like loosing some part of your money. Have you been experiencing that? Just relax. Its natural.
The worst part is that when we’re in that mindset, we can actually create a self-fulfilling cycle. Maybe we’re trying too hard. Maybe we get sucked into a variety of different indicators that we never followed before. Or perhaps we get into one trade hoping that it’ll make up for all the losers we just had.
Nine times out of ten, it never works out though. The end result is that you lose more and more money. But it doesn’t have to be that way. So here are six simple rules for you to follow that will help you manage your emotions better and become a better investor.
Rule #1: Hope to make more money, fear to lose more. In the book Reminiscences of a Stock Operator, this was one of the most important lessons that trader Jesse Livermore learned in his time as a trader.
When he got into a position and it started losing money, he realized that he had to get out of it quickly (cut your losses). So what he’d do was to fear that he’d lose more money and get out of the trade. On the other hand, if the trade was going his way, he would hope to make even more (let your winners ride).
Rule #2: Stick to Your System, NO MATTER WHAT. This is a tricky rule to stick to, even for experienced traders. But the truth is this: If you have a system that you know for a fact works, then don’t stray from it. You will only end up losing money.
Why do investors stray? Sometimes it’s the feeling of invincibility they get after they’ve won a few trades in a row. Other times it’s simply because they are desperate to hit a winning investment. Whatever the reason, when you stray from your system, you stray from what you know works. Ignoring what you know is never a good way to make money.
Rule #3: Don’t become attached to your money. Sounds easy, right? You’d be shocked how hard it is to actually implement. Too many people put money in the stock market that shouldn’t be there. If this is your retirement, or tax money, or money you owe to somebody, DON’T USE IT IN THE STOCK MARKET! Only use money that you can afford to lose.
Rule #4: Don’t play catch up. If you’ve hit some losses in the stock market, the last thing you should do is ‘double up’ and hope to hit a winning trade. What if you don’t win? You will lose twice as much and be in even more pain.
Listen, losses are a part of the game. Every investor in the world loses money from time to time, but if you’re system works (rule #2) then stick to it and you should end up back in the green in no time.
Rule #5: Don’t overanalyze things. I can’t tell you how many times I open up the Wall Street Journal and see an article that goes completely opposite to what I believe to be true about a particular sector or investment. Does that mean I listen to them? In all honesty, I look at the argument and see if it has merit. If it doesn’t, that’s it. I stick to what I believe to be true unless something drastically changes.
In my trading arsenal, I have a few indicators I look at and then have certain beliefs about the market and sector based on a few people I trust and what I know of the market. Everything else is just static. It’s only there to agitate you.
Rule # 6: Listen to yourself. One thing I’ve learned is that as you trade, you find out new things about yourself. You find out what your true fears are (fear of success, maybe?), you find out your weaknesses (maybe not following your system to a T), and you find your strengths (maybe you make money best in certain sectors). As an investor, you need to pay attention to all of these things. That way if a certain emotion is cropping up and threatening to lead you in the wrong direction, you could quickly stop it and move on.
If you can stick to these six rules, you’ll be able to have a much better grasp of your emotions while you trade and also make more money in stock market.
Will The Stock Market Ever Recover?
Many investors have sat and watched in bewilderment as the value of their stocks plummeted, a reason I have been asked over and over if the stock market will ever recover from the losses that have been accumulated over the past eight months. To be specific, investors have lost nothing less that three trillion naira in terms of paper losses alone. I said paper losses because the losses you see in your portfolio are not real until you give a sell order to your stock-broker, stocks are volatile assets whose value can change within a few trading days.
REASONS FOR THE PERSISITENT DECLINE
1. LOW INVESTOR CONFIDENCE: The bearish market which started in March has eroded the confidence of many investors, especially, those who entered into the stock market within the past two years. The peculiar thing about these new investors is the fact that a lot of them see the stock market as quick money making venture, and as you know, some of them have never witnessed such a long bearish period as we have witnessed within the past few months. It is also noteworthy that several investors had just begun to recover from the losses they sustained from wonder banks like Nospetco, Sefteg, etc; in 2007. I remember that such investors were condemned for being too greedy by stock analysts and they were admonished to limit their investment to stock market alone. So, at the beginning of 2008, we experienced a massive exodus of investors from the wonder banks to the stock market, but alas, the stock market has been crashing which have made such investors to resign from the investment world. This is no good news for all stakeholders in the market because all over the world, the confidence that investors have in a market determines how successful that market is since they are the ones who move the imaginary hand of demand and supply at all times.
2. POOR IMPLEMENTATION OF POLICIES: Our regulatory agencies should take one or two punches for the current situation of things because they have been slacked in their approach to recent developments in the market. A stakeholders meeting was finally called on the 26th August to find solutions to the current situation after six months of a bearish market. Since then some of the policies that were identified have either not been implemented or simply relegated to the background. The most important of this is the creation of a stabilization fund to stem the bearish trend whenever necessary, I don’t know how you look at it, but from my point of view, I think this issue should have taken priority over other policies because without funds that are needed to buy stocks, the stock market can simply not move, it’s as simple as that.
Dear friends, gone are those days that fundamentals count and investors are motivated to buy shares because of good quarterly and audited results published by companies. Investors are not moved by results again and if you want to contradict this argument, check what has happened to the likes of Fidelity Bank, Oceanic Bank, etc; since they declared their fantastic results. The truth is, things are not normal and desperate situations require desperate actions. In addition to this, the authorities have not addressed the investing public since August 26. I have reasons to respect the American spirit better within these past few weeks that the Americans have been hit by an unprecedented financial crisis. Within two weeks, the president of the USA, the Senate president, speaker and federal reserve chairman have addressed the American public four good times trying all they can to update Americans on the situations of things and the way forward but it’s not like that here, investors are always left guessing.
Another controversial policy is the introduction of a minimum one per cent drop in prices while allowing stocks to gain a maximum five per cent in a day; this has caused what some investors call a slow motion in the stock market, a situation that has made the sale of stocks even more difficult than in the past, this was supposed to be a temporary measure but I think it’s here to stay. The list of the number of inefficiencies from our regulatory agencies cannot be exhausted in one piece of article, it is better left as it is.
3. GLOBAL FINANCIAL CRISIS: the Nigerian crisis actually preceded the ongoing global financial crisis which started in the USA with the collapse of big banks like the Lehman Brothers, Merrill lynch and WAMU. Stock markets all over the world are currently taking the beating of their lives. As a matter of fact, the Russians had to shut down their stock exchange for two trading days in September in order to arrest excessive decline in stocks. Last Thursday afternoon, I saw some investors protesting in the legislative house in Hong Kong because of the losses they have made on their portfolio. Don’t mind the CIBN and CBN which recently came out to say that we are immune to the global financial crisis; the truth is that we are not immune and I will state my reasons.
First, recall that we had touted the entry of foreign institutional investors who were planning to come into the Nigerian market as one of the factors that will lead to a bullish market in 2008, but at present, the JP Morgan, Merryl Lynch, or Barclays of these world won’t come into the Nigerian market for now because they have serious problems to contend with back at home. In fact, Charles Soludo, Governor of Central Bank of Nigeria recently shifted the blame for the recent market drop to some of these foreign investors who have pulled their funds out of the Nigerian stock market.
Despite all these challenges, it is not all gloomy for the Nigerian Capital Market because there is always light at the end of the tunnel, this market will definitely recover soon and the road to recovery will form the central theme of my article in the next edition. Watch out for it.
How To Make Money When The Bulls Returns.
It is now time to make money from the stock market again. There are usually two parts to stock markets- the bear and the bull. The bull represents rising up of price while the Bear represents the falling of price; whichever way, the price of any stock must go through this process.
Normally, all stock prices go up and down. There is no price that goes up that does not come down and there is no price that goes down that does not go up; whether good or bad stocks, penny stocks, blue chip, growth stock or defensive stock. For a while in the Nigeria stock Market, we have been seeing the downtrend of prices; that is the bearish movement of the stock market.
A market becomes bearish if the market capitalization has lost between 15 % to 20 %. It is therefore easy for us to say that most of the stocks have been down because they have lost 15 % to 20 %. I am sure if you bought your stock about 3 months ago, you would have been unhappy with yourself, but I am here to tell you that the bull is returning with the full force, but consider the following strategies.
1) Most of the stocks that have been down since the beginning of the capital market this year will definitely pick up this year.
2) Most of the stocks that had their year end two, three, and one and from this particular month should start picking.
3) Stocks that are going for normal public offer and private placements should generate you money.
Now to trade the bull market properly, these are the steps to consider
1) Find out the stocks that have lost 30% and below during the bearish, lost period and their hope of rebound.
2 Check out the stocks that have been losing since the bullish run started at the beginning of the year. They are the ones that will pick up in the advent of the return of the bull.
3) Check stocks that have 3 months before this month and one month to this month; they are good stocks to buy, buy confirm other fundamentals.
4) Buy stocks that have the prospect of bonus and good dividends.
5) Buy stocks that are newly listed
6) Never be too greedy in this bullish run, because no greedy man wins in the stock market.
7) Most of the stocks available now are good foe medium term and those that are for short term must be quick ones.
At this point we open doors for comments, feel free to add your own tips.
How to Recognise Bearish Signs.
A bear market is every investor’s nightmare. Many bear markets begin when the economy and markets are steaming ahead and catch investors unawares. When it does arrive, a bear market creates panic and pessimism. However, for those who are able to forest the onset of a bear market and lighten stock investments in time, it presents a great opportunity.
Recognizing Bearish Signs
There are many signs of a bear market. However, Many investors ignore them.
These signs typically are at market top when there is a tendency to ignore ‘bad news’ and warning signs. Traders / investors start believing that the market will continue to go up and up and suddenly to decline.
It is important that traders / investors recognise bear market signals and remain prepared for it. This is not too difficult, as bear markets do not arrive overnight. When bearish signs are identified it is recommended that a trader / investor takes action by reducing exposure to stocks.
Below are some of the signs of a bear market:
1 Increasing interest rate and economic recession.
2 Market rising when interest rate are rising.
3 Cooperate earnings reports coming in below expectation.
4 Over-valued Price Earnings (PES) market rises too much from normal valuation levels
5 Excessive enthusiasm and ecstasy, especially by professionals which typically occur near the end of a bullish market and the start of a bear market.
6 Low quality and priced stocks start to appreciate in price.
7 Excessive speculation.
8 Unusual trading volume.
9 Investors seeking shelter in blue – chips.
10 Distribution as indicated by high volume on down on up ways.
11 Rallies failing on later volume.
How To Recognise Bullish Signs.
A combination of several factors starts a bull market. These include turn-around in the economy or recovery form recession, reduction in interest rates that eases credit and improves liquidity in the system, increase in inflation, impressive corporate performances and benefits declaration, favourable changes in government policies / regulations, to mention a few.
Generally, factors that effect upward stock price movement tend to initiate a bullish market in stock market. A trader / investor should invest when a bull market is imminent in order to generate huge gains. Therefore, to get the maximum benefit from a bull market, a trader/ investors should analyse and identify the potential leaders, most especially, blue chip companies with sound fundamentals and good prospects because they are usually the first to enjoy the stock rise. These stocks usually have a very strong and positive correlation with the stock market.
Recognising Bullish Signs: The following are some of the probable signs that may usher in a bullish market regime.
1 Decreasing interest rate.
2 High Inflation.
3 Emergence of bargain price because of excessive pessimism.
4 High level of cash in circulation.
5 Few significant price declining.
6 Decreasing flow of primary market activities (new issues can adversely affect the secondary market’s supply / demand balance).
7 More buyers than sellers.
8 Accumulation taking place as indicated by high volume on up days and low volume on down days.
Net Asset per share (NAPS) at above stock market price.
How Stock Market Capitalization Measures The True Value Of A Company
Why is a stock that costs N50 considered cheaper than another stock priced at N10? This question opens a point that often confuses beginner investors: the per-share price of a stock is thought to covey some sense of value relative to other stocks. Nothing could be farther from the truth.
In fact except for its use in some calculations, the per-share price is virtually meaningless to investors doing fundamental analysis. If you follow the technical analysis route to stock selection, it’s a different story, but for now let’s stick with fundamental analysis.
The reason we aren’t concerned with per-share price is that it is always changing and, since each company has a different number of outstanding shares, it doesn’t give us a clue to the value of the company. Gone are those days when Nigerian Breweries in the brewery subsector was the most capitalized company listed on the floor of the Nigeria Stock Exchange. In the market now the banks are in a tussle over which of them will emerge the most capitalized bank because of the measure of their value.
For that number, we need the market capitalization or market cap number. Find below current StockPicks’ 40 most capitalized stocks.
The market capitalization is calculated by multiplying the per share price by the total number of outstanding shares. This number gives you the total value of the company or stated another way, what it would cost to buy the whole company on the open market.
Here’s an example.
Stock price = N50
Outstanding shares: 50 million units
Market Cap:N50 x 50,000,000 = 2.5billion.
To prove my opening statement, look at this second example:
Stock price : N10
Outstanding shares: 300 million units
Market Cap: N10 x 300,000,000 = N3billion
This is how you should look at these two companies for evaluation purposes. Their per share prices tell you nothing by themselves.
What does market capitalization tell you? First, it gives you a starting place for evaluation. When reviewing a stock, it should always be in a context like ….. how does the company compare to others of similar size in the same industry? The market generally classifies stocks into three categories:
Small cap under N1billion units
Mid cap N1- N10 billion units
Large cap N10 billion units Plus
Some analysts use different numbers and others add micro caps and meg caps, however, the important point is to understand the value of comparing companies of similar size during your evaluation.
You will also use market cap in your screens when looking for a certain size company to balance your portfolio.
As I conclude this week, don’t get hung up on the per-share price of a stock when making your evaluation. It really doesn’t tell you much. Focus instead on the market cap to get the picture of a company’s value in the market place.
Strategies Of Stock Portfolio Planning
Many investors buy stocks with no clear investment objectives in mind, in a bearish season, it is such investors that are worst hit. Can you imagine an investor putting all his money in penny stocks or just banking stocks? These are good examples of bad portfolio management. Why a lot of investors have been currently hit by bearish run in the stock market within the past few months is a lack of good portfolio planning and structuring.
But I also believe that the current states of stocks prices in the market will give you a good opportunity to have a rethink on some positions you have taken and also buy into stocks that are currently cheap. Do you even know that there are times that it will be better for you to hold your cash instead of investing in stock market because of a downturn in the market? This is what portfolio planning will help you to achieve.
BUILDING YOUR PORTFOLIO
The following questions will help you in creating investing objectives and also help you in knowing how to diversify your investments among quoted stocks, public offers, private placements, bonds and cash. Ask yourself these questions before investing at any time:
1) How soon will you need to draw upon your investments? The longer your time horizon, the more weight you should give to stocks. With time on your side, you can afford to ride out the occasional downward movement in stocks. On the other hand, if you expect to begin drawing on your investments in the intermediate or short term, you should consider shifting your emphasis to income and safety.
2) How concerned are you about inflation? The greater your concern, the more you should invest in quoted stocks. Beating inflation is one of the benefits that stock investments have over other instrument like fixed deposit or government bonds. If you had kept your money in a fixed deposit account yielding a 10 percent return since 1980 by 2006 the value of that investment will have been eroded because our inflationary rate has been measured above 10%.
3) How important is that your investments not drop significantly in value? If wide price variations are likely to keep you up at night, you should be emphasizing bonds and blue chip stocks. Basically, we have two types of investors; the risk takers and the risk averse. A risk taker is not really affected but short term fluctuations in stock prices and he can also invest in highly volatile stocks like penny stocks but if you are a risk averse investor, I will advise you to concentrate on those blue chip or income stocks which rate of volatility is very low. In that category, you will find the likes of first Bank, Guinness, Mobil, Total, UBA and some others.
4) Are your investments a source of emergency funds? If your funds will be needed within a very short term, a cash reserve is a good idea for emergencies, so you don’t have to sell your stocks at a loss during bearish market conditions. Cash reserves may come in form of a term deposit which you can arrange with your banker or through treasury bills which matures in thirty to ninety days.
It’s important not to take your investment planning for granted. Once you have decided on a strategy, give it an annual check up, to be certain that you are staying on course.
How to Position yourself for Stock Investment
Every man on earth has been given the law of multiplication: Go into the world and multiply. Multiplication cannot take place until investment is applied. Investment is like a seed; when planted it germinates to produce fruits. You will always bear the consequences of not delivering this potential to the society.
Everyone has been given ability to invest no matter how small their income is. Even the poorest man has this ability. And your status in life is rated by your ability to do investment.
Investment Status
Investment status is the capacity of an investor at a particular point in time to invest. It can be measured financially in terms of cash or in terms of information available to the investor; or in terms of the zeal possessed by such investor whatever the case, it is a proven fact that nothing else can improve your status in life except investment.
As long as earth remains, seed time and harvest shall not cease.
Types of Investment
Definitely there are different classes of investors and the type you belong is a determining factor in your position, in the wealth hierarchy, in the stock market. The types are:
Active Investors
These are the people who trade with their investments. These types of investors are capable of raking in 100% returns from their investments.
This is the millionaire group and only few have been able to tap into this wealth resource.
Passive Investors
These are the people who put their money in stocks or investments and expect excessive interests in terms of dividends and bonuses.
Many small and medium scale investors (SMSI) belong to this group.
Portfolio Builders
These are the people who build their investments gradually for the sake of the future, not minding whether there is dividend or not. Call them pensioners but their generations will never beg in life.
Poverty Victims
These are the people who store their money in investments that yield little or not profit. These sets of investors are characterized by:
(1) Fears of loss
(2) Feeling of “I don’t have enough to invest”
(3) Slothfulness
(4) Wickedness, blaming the economy, blaming their present predicaments on their past misfortunes etc.
The Best Investors
The first two kinds of investors are short-term investors and most times, they are involved in stock trading. The third kind of investor is a long term and he looks to the future.
The fourth kind of person will not always get returns on investment, rather, he gets punishments like inability to train wards in higher institutions, suffering at old age (Retirement), and as the bible puts it, “the little they have will be taken from them and given to those who already have.”
That is why the saying that, the rich will continue to get richer and the poor will continue to get poorer, may just keep a date with you until you change your mindset in the right direction.
And at this point, we open the floor the floor to comments, questions, cheers and jeers. If you have any further tips, share it so we can learn together)
How the Rich Make Money in Stock Market.
For a quick understanding of the word “Stock Market or Capital Market” lets flash our mind back to the meaning of the word “Market”.
Market as we all know is a place where buying and selling takes places. Market in general has many characteristics of which one of the characteristics is; it must have more that one point of entry.
Like wise stock market has three viable mode of entry:
1) Private Placement Offer (PPO)
2) Secondary Market Transaction (SMT)
3) Initial Public Offer (IPO)
Generally, stock markets trade can be transacted through any of the above medium. Lets explain it one by one.
Private Placement Offer:
This involves a system where by a company approaches a selected individuals or high network investors by the way of invitation to buy stocks in the company. Before a company’s stock will be listed in Nigeria Stock Exchange, certain requirements must have been reached.
One of the requirements is that the company most have at least 300 investors. For a company to achieve this, they must pass through Private Placement Offer. This is the time the rich and anybody who wants to be rich buys their stocks.
The richest man in the world made 80 % of his money through Private Placement Offer.
Secondary Market:
When the company has satisfied all the requirements of the exchange regulatory (which includes private placement), the company will now be listed and to be traded in stock market. Most time, the Listing price is always twice the private placement prices.
Immediately after Listing, wise investors who missed the opportunity for buying private placement then, will now buy more quantity of that stock through Secondary Market.
Public Offer:
Do I hear you say I bought one? Listen, wise and rich investors don’t always buy public offer.
It is a well-known fact that most people that buys public offer don’t know anything about Stocks. 80% of people that buys public offer are doing that for just for buying sake.
This is the time when most people buys their shares while the wise investors use this opportunity to sell all (off-loads) their stocks to the masses.
Most companies use this medium to generate money for themselves wherever they want to expands there branches all over the country. One thing that is not so good about this type of investment is that your money will be tired down for a period of 6 months or more waiting for your share’s certificate. You can’t do anything with the stocks until you get your certificate. Also the price of the stocks here is always on the higher side. Wise investors buys when the price is down and sell when it’s high.
In conclusion, it is a well known fact that stock market is the only instrument that gives equal opportunity to both the rich and the poor to access wealth and multiply income (either by private Placement, Secondary Market or Public Offer).
(Have any tips? Add it to the comment below so that we all can share it together)
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