It often happens that the first-time investors take to investing in shares motivated by the fascination toward the stock market, and in most of the cases they ignore the rationale behind a rise or fall of a company’s share. It is not always the case that whoever enters the stock market, leaves with a neat profit. Rather, it is much easy to enter the market, and equally tough to stay invested and make profits consistently. Listed below are certain dos and don’ts for those who are new to the volatilities of the stock market.

INVEST WITH A LONG-TERM HORIZON

While gains may start accruing immediately after investing in a stock, investors generally, and firsttime investors in particular, are advised against booking profits on their investments in the short term. This is because little gains booked on your investments may not significantly contribute to your monthly income. But a long-term investment would provide not only a healthy capital appreciation but may also give you a regular and growing dividend income. Moreover, a long term investment in equities can prove to be a good source of wealth in later life.

BUY WHEN EVERY ONE IS SELLING

First-time investors typically invest in stocks enticed by the noise and din created by a rising bull market. But you are better off entering the market when others are selling and the market or a particular stock is falling and not in flavor. Buying when everybody is buying raises your acquisition cost and minimizes the chances of an upside. There is no rocket science here, it’s a simple rule of life –higher an object goes, and greater is the probability of its falling and vice versa. Remember in the stock market, nothing is guaranteed; you can just hope to improve your odds by buying low and selling high.

LOW MARKET PRICE DOESN’T MEAN IT’S CHEAP

Don’t invest in a stock by just looking at its current market price, a stock with a lower market price compared to another stock in the sector doesn’t necessarily former is cheaper. A stock’s market price is a function of its number of floating shares, its net worth (book value), earning per share and its price to earnings multiple. It may happen that a stock with a market price of Rs 4,000 per share may be cheaper than a stock with market price of Rs 100 per share because the former may have few outstanding shares and very high earning per share say Rs 400 per share, which translates into a P/E multiple of 10. In contrast, the latter may have a very large number of floating shares and an EPS of say 5, which translates into a P/E multiple of 20. So, in the above example, the latter is twice as expensive as the former.

BE CAUTIOUS WITH IPOS

While investing in IPOs, select IPO of a company with a good track record and low valuation. Read enough about the company’s business and growth prospects before taking the plunge. While investing in an IPO for the first time, don’t subscribe to it with a short-term intention of making listing gains. This is because, not all companies end up producing gains for the investor immediately after the listing. Making a beginning in the stock market maybe a lot easier, but building a fortune takes time. One should be careful and must not overleverage. Well-known investor Warren Buffett said: “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”