5 Golden Rules for Investing in the Stock Market

Before knowing about the rules, one should first know what the Shares and Stock Market is?  

A huge amount of money is required for starting any business or company. For which, a company is divided into small portions, which we call “Shares”. And then they are sold to the public.

For example, suppose there is a businessman Mr. X. He has a company ABC of which value is Rs. 50 Lac. He wants to grow his business, for which he needs 40 Lac more but he has not that much amount. 

So what will he do? He will issue 4 Lakhs shares with Rs. 10 per share value each in the share market. Now you are thinking what is that Share Market? 

Share Market

Look!! When you need to purchase or sell something you go to market. In the same way, there is a market designed and meant for buying and selling of shares. 

Earlier, in the absence of computers, it was all physically marketed like one can buy and sell shares through auctions.

But nowadays, it is all converted to online with the invention of computers. Now the shares are held in electronic form and you can do all transactions sitting at your home through the internet. 

Types of Share Markets

Mainly, there two popular markets having a lot of buying and selling of shares, they are NSE (National Stock Exchange) and BSE (Bombay Stock Exchange). Whichever the companies that issue their shares, they have to get registered in these markets. 

Difference between NSE and BSE

In NSE – 1700 companies are registered, while in BSE, 5400. The ups and downs in shares in NSE are called Nifty. On the other hand, in BSE, they are called Sensex. 

The share value i.e. 10 per share has to be divided by the company before issuing the shares. 

Now the other company will buy the shares of Mr. X and he will get the required amount for his business growth.

And the shareholders will get their share in the company. Besides, there are various employees in the Stock Market working as Financial Brokers or Stock Brokers. Their job is to give you suggestions, like which company or business you should invest in or not and how much money you should invest.

Apart from this, they buy and sell shares for you and they charge a certain amount of commission (Brokerage) in return.

Golden Rules

Further, if you are planning to invest in Share Market, there is a list of five “Golden Rules” with details that you should keep in mind. 

Patience and Courage 

The first rule is to be patient and courageous as a graph of the Share Market does not always go up or in a straight line and the businesses need much time to perform well.

Therefore, you should give some time to businesses during investment. You should have that courage even in cases of ups and downs in the stock market. 

You have to hold the shares with patience. Because many times, even the stocks of the reputed companies fall for a short time. Also, understand the power of compound interest.

Understanding of the Business

The second rule is that you should make an investment only in that business you are familiar with and understand properly.

There are several businesses in the stock market which are generally new for us.

So first you should try to understand these businesses. You can understand them by talking to the people connected to those businesses.

And if there is any business that you are not able to understand leave it because for doing the fundamental analysis of that business, it is very significant to have detailed knowledge about the business you are going to invest in. 

If you are investing in any business without its proper understanding then it would be speculation.

Be Focused 

The third rule comprises of focus. You should know what your requirements are, like what kind of company you want to search for.

Once you have decided, your focus will be only there. You should not do multitasking instead that you should focus on one thing (company) at one time. 

Analyze the Competition 

You should pay attention to the competition while analyzing that business. Along with that, there are also two main things that you should pay heed to.

Firstly, Competitive Advantage, with the help of what company is beating its competitors. 

For instance, the competitive advantage of Amazon is Prime Amazon and Fast Delivery. They also have a lot of other competitive advantages.

Also, the competitive advantage of Maruti is Low Prices. 

Secondly, Entry Barrier, means you should look after as to whether competitors can easily enter that business or not. For instance, in the Credit Rating Business, the Entry Barrier is strong that means no company can start a Credit Rating Business. 

Similarly, in Depository business where our shares are held in electrical form, there also the Entry Barrier is so strong.

Moreover, there are two depositories in India namely, NSDL and CDSL. No company can start a Depository business as well. However, there are a lot of such businesses that have low Entry Barriers. 

Therefore, you should keep in mind the Competition and Entry Barrier of the company while making investments in shares.

Long term Investment

The fifth rule is to look for companies with a long term competitive moat. Sometimes, the success of most of the companies remains stable for a little time. So you should find such companies that can perform well at least for ten years or more.

And for that, the company should have an excellent Competitive Advantage that will remain intact at least for more than 10 years.

You are not buying a market; you are buying a company so go for a company with QG and QGL characteristics. Further, it has a good business, excellent management, growing earnings, and is going to run for a long time. 

Conclusion