Three Basic Rules of Investing in Stock Markets

       

                                                These three are some of the most simple but most logical and wise rules which I had chanced to read upon recently. It will be useful to each and every investor in selecting the stocks to invest.

Rule 1: Don’t buy unlisted shares:

                                            Stock exchanges do not permit trading in unlisted shares, nor do they permit their registered members to deal in unlisted shares. If you want to buy unlisted shares you won’t get the protection of the stock exchange authorities nor will you be able to use the services of your stockbroker in handling such transactions. You won’t be able to access the market price of the unlisted share also. All these factors create complications and risks, which you are not likely to be in a position to handle.

Rule 2: Don’t buy inactive shares:

                                           An inactive share is defined as one which is transacted less than two times a month, or not at all. The main reason why shares are inactive is because there are no buyers for them. They are mostly shares of companies which are not doing well and whose future prospects appear to be dim. The simplest way to find whether a particular share is inactive or not is to regularly scrutinise the stock market quotations which appear in the daily newpapers. If you find that a particular share has not been quoted for a long time, you can presume it is inactive.  Every time you buy a share, you must remember that one day you will want to sell it. If you think you are likely to face difficulty in selling it – don’t buy it! This is a sound investment principle which you should never lose sight of, no matter how cheap or attractive a particular investment may appear to be.

Rule 3: Don’t buy shares in closely held companies:

                                               Shares of closely held companies tend to be less active than those of widely held ones since they have a fewer number of shareholders and, thus, a smaller floating stock of shares. Shares of such companies tend to be ignored by the general public. It is always to manipulate the share prices of a closely held company that those of a widely held one. Share prices of closely held companies tend to be more volatile than others. Investing in such shares requires a high degree of expertise, knowledge, alertness and quick thinking which take years of active investing to acquire.

Source: Profitable investment in shares by SS & Navjot Grewal