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5 Principles to Understand the

Science of Equity Investing

Investing in the Stock Market

Stock market investing is considered one big gamble. It is considered

highly risky, volatile and complex, and thus, not everyone’s ball game.

Many feel there is no sense to the way the market works. However,

understanding the science of equity investing will make you realise

that there are some simple rules dictating the market. Here are five

such principles:

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#1Buy at lows, sell at highs

Buy at lows, sell at highs

This is the core stock market principle. You will make money only

and only if you buy at a low price and sell at a higher price. The

difference is the profit that you pocket.

So, if you are looking to enter the market, don’t cheer when the market

is up. Similarly, if the market is falling, don’t fret.

Your opportunity lies in a falling market.

This is the time to buy stocks that may be cheaply available. If you are

already invested and are looking to sell, then a bull market is the best

time.

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#2 It’s all about timing

It’s all about timing

When you invest in the stock market, you will

ideally be looking to accumulate stocks of good

companies. These companies will then bear fruits

in the long term. However, simply buying a good

company’s stock is not enough.

You need to get the timing right.

This ensures you get the best – and lowest –

price possible.

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It’s all about timing (Contd.)

Similarly, you need to sell at the right time to maximize your profits. So,

you need to be patient and wait for the right time to buy or sell. Just

because the market has risen does not mean it will not continue to rise.

So, if you sold just when a market uptrend has started, you would

lose out on profits.

Similarly, if you buy just when a market downtrend is setting in, you

would miss buying at lower prices. Patience is key. Knee-jerk reactions

should be avoided.

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#3History always repeats itself

History always repeats itself

"The four most dangerous words in investing are: 'this time it's

different.’” Sir John Templeton had famously said. He was one of the

biggest names in the investment circles.

In the stock market, don’t blindly invest.

Look at the past trends in the stock. These could help you identify the

cheapest price to buy and the highest price to sell. Don’t get carried

away with the market sentiment.

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Here’s an Example-

If you decide to buy a stock once you deem the company to be

valuable, and log into your trading account. Fortunately, the market has

fallen that day, and you decide to buy. Wait! Check what has been the

lowest price in the near-term. Historical low and high prices often act as

key levels. Technical analysts call these support and resistant levels.

They are important. It may be worthwhile to wait and let your stock

touch these levels before buying or selling.

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#4If the company succeeds,

so will your stock but not

in the short-term

If the company succeeds, so will

your stock but not in the short-term

As we said earlier, the idea of stock market investing is to pick stocks

that are likely to give you the best profits in the future. However-

Patience is of great essence.

Any company, no matter how good, will take time to succeed. So, the

stock will also take time to give you returns. This is because the market

goes through cycles.

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Short Term Vs. Long Term

Stocks will rise and fall in the short term irrespective of their

inherent value. How much they rise or fall depends on the market

sentiment. However, in the long term, the stock will rise if the company

is valuable. This is because the company would have proven to bear

fruits. So, the stock becomes more valuable.

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#5 Ideas can be profitable

Ideas can be profitable

There are two parts of the stock market – primary and secondary.

The secondary market is where stocks are traded. The primary market

is where a new company gets listed on the exchange. At this stage, it

may often be a very small company.

As an investor, you will basically be betting on the

profitability of the idea and the business model, than

the company itself.

Yet, this can be very profitable.

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Here’s an Example-

Infosys offered shares for Rs 98 during its Initial Public Offer (IPO) in

1993. Today, they are worth Rs 3600. If you had bought 1000 shares

during its IPO for Rs 98,000, they would now be worth Rs 36,00,000.

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require any clarification or have any concern, kindly write to us at below email ids:

• For Trading Account related queries: service.securities@kotak.com

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