|Rules for stock selection|
While selecting stocks prior concern must be given to securing your fund or capital. So that you never get thrown out of market. Although there is nothing like fundamental rules for stock selection but there a some ways though which we can avoid greater risk or which ensures some safety to our hard earned money.
These are methods which i follow in my investment, do your own research before putting your money into any stocks or investments.
- Never put all your money into single stock: To what extent you have been researched? and how professional you are in this field didn't matter, it will not ensure guaranteed success. And there always be some risk in the stock market so never over evaluate your ability. When you put all your money in single stock there always be risk loosing all your money if stock price goes against you. Diversify your portfolio.
- Not excessive diversification:- At one hand diversification provides margin of safety on another hand over diversification minimises power of your capital and also exposes you toward failure. You can limit your stocks to 10 to 30 of different companies.
- Buy in installment or averaging cost price:- This method protects you from buying at wrong time. If you put all your money in single purchase and after that stock price falls then in that case you have nothing in your hand through which you can average your purchase price. You entered in this purchase at the wrong time. Always keep some money in your hands.
- Purchase stock on the basis of its intrinsic value:- Try to avoid paying more than intrinsic value of your stock or buy when stock price is near its intrinsic price or available at the discount(stock price less than intrinsic price).
- Avoid high P/E ratio stocks:- there always be high probability that these type of stocks may be overpriced and investor are bullish on its future. I prefer low P/E stocks. If i get any stock which market value is below its intrinsic value with good fundamentals then its like extraa butter on bread.