Strategies For New Investors

Since Reliance Power IPO many people are waiting on the sideline to invest money in stock market. But due to the failure of Rel. Power IPO and simultaneous fall in over-all market these people are left totally confused. The good thing now is that people has not panicked and still want to put their money. They are just waiting to time the market. Moreover there are number of people who want to build their portfolio.

For such investors who are totally new to the market, the best strategy would be to start building their portfolio without waiting for the market to bottom out. One must remember that it is practically impossible to time the market. One cannot buy at absolute bottom and sell it at absolute peak. Hence, points to be kept in mind are:

1) Invest in Large Cap and Reputed Mid-caps only

Start deploying 15-20% of one’s capital at this level in the Large Cap companies which are 35-40% below their January highs. There are many such companies which have seen such a fall. Besides that there are many reputed mid-cap companies which are now available at attractive levels. One can deploy another 15-20% of cash when market falls further or when the stocks short listed by you falls 5-10% from your purchase price. This way one can average out one’s acquisition price. But remember to invest in well-known companies only as these are the safe bets as against small and relatively unknown companies where risk of wiping out of your capital is much higher.

2) Never invest in Lump-sum at one go

It is really a bad idea to invest your entire capital at one go. However convinced you may be that market or your stock will move higher, you should not be fully invested at once. A little bit of bad news which may emerge out of the blue is enough to bring down the stock price further. Recent case being that of ICICI Bank which was quite attractive at Rs.1000 before the news about its indirect involvement in the sub-prime crisis broke out. Those who might have invested his entire capital allocated for that scrip at above Rs. 1000 would not be in a position to add more quantity of that scrip at current level. So deploy only 15-20% of capital at every attractive level.

3) Ideal Portfolio should not have more than 10 to 15 scrip

This is one of the most important things which small investors often don’t care about while building portfolio. Some people invest their entire capital in just one or two scrip while others go on buying large number of scrip. Sometimes they have more 50-60 different scrip in their portfolio which is not at all a good strategy. A large number of scrip in one’s portfolio has many demerits of its own. While over-exposure in just one or two companies is too risky as your entire fortune is linked with those companies only.

Therefore, ideally a good portfolio is one in which there are no more than 10 to 15 different companies. Investment should be spread across those sectors which are out performing the market or have a great future ahead. Never invest in many companies in the same sector. Just one or two well-known and profitable companies from each sector should be picked.

4) Have Patience

Give some time to your investments to grow. Never act in haste either to buy or sell. Usually large-cap move up immediately if market rises. But mid-caps even the quality mid-cap take time to rise. So give adequate time for your investment to rise. Sell or book partial profit only when your investment gives very high return.