Stock Market Tips and Tricks

Investing in the stock market involves risk and returns. Higher risk tends to give a higher return, but not every investor is willing to bear high risk.

Managing Risk

It is crucially important to select stocks based on the risk you are willing to bear. Once an investment is made, manage it periodically.

Risks include obsolete business models, new competitors, exchange rate risk, and general market risk. It is a good tip to plan your trading risk. Set a risk-reward ratio for yourself and trade capital accordingly.

When to Buy Stocks?

There are different approaches to determine the fair value of a stock. When the market price per share is less than your calculated fair value per share, it means the stock is undervalued. This is generally the best time to buy.

When to Sell Stocks?

Investors should consider selling when:

  1. The calculated fair value per share is significantly lower than the current market price (overvalued).
  2. The price has risen dramatically, earning huge revenue (taking profit).
  3. The company’s fundamentals deteriorate (e.g., net assets turn negative).

Approaches to Stock Analysis

Top-Down Approach

The investor analyzes economies first. Every country has different economic conditions. After analyzing economies, different industries are evaluated. Finally, specific assets/companies are selected from those industries.

Bottom-Up Approach

Investors focus on selecting individual stocks based on their specific merits, rather than systematically studying the broader economy and industries first.

Conclusion

There are many tips to pick the best stocks, but success depends on how you analyze and evaluate data. The crux of successful investing is to invest logically and avoid emotional decisions.

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