Successful stock investing requires a lot of discipline. Thousands of stocks are listed on Indian stock exchanges, and you have to find 10-15 good stocks to invest. For the remainder, you only have to say ‘no’.
Rule #1 of Stocks that you should avoid
As a primary rule, avoid investing in companies you don’t understand. If you can’t figure out how the company is making its revenue, what is the company’s business model, what are the products / services offered by the company, or what is the use of the products — avoid investing in that company .
For example, if you have zero knowledge of semiconductors or microelectronics, and do not understand the use of Zener diodes, MOSFETs, amplifiers, etc., avoid investing in semiconductor companies that manufacture these products. There is no way that you can understand market demand, product quality, future prospects, or even competitors.Instead, invest in companies you can understand. Some common industries that one can understand with very little effort are consumer goods, FMCG, automobiles, utilities etc.
4 Common Types of Stocks That You should Avoid Investing In
- Low liquid Companies
There are some stocks whose prices may fall continuously, but investors are not able to sell that stock just because there are no buyers. Getting out of a less liquid company can be quite stressful. Avoid investing in companies with low liquidity.In general, stay away from companies with a daily average trading volume of less than ten deficiencies. The higher its volume, the better. (If you are new to the concept, check out the versions of some of your favorite companies on Moneycontrol or other financial websites to get a good idea of daily trading versions.)
- High debt companies
In companies, debt is like a big hole in a ship. Until and unless, these holes are filled — the ship cannot sail far. Avoid investing in companies with high debt. As a rule of thumb, stay away from investing in companies with too much debt and more than 1 debt / equity ratio in your balance sheet.
- Falling knife category companies:
Do not try to catch a falling knife! Investing in companies whose share prices are constantly and substantially decreasing (eg- Gitanjali Ratna, Yes Bank, PC Jewelers, PNB, Suzlon Energy, etc.) is never a good idea. There is always a reason why the prices of these shares are continuously falling, and the market is punishing that company.Apart from this, there are thousands of listed companies in the Indian stock market that you can search. Trying to catch a falling knife usually injures your own hand if you are not trained to do so.
- Low visibility companies
There are some companies in the Indian market whose information is not easily (and transparently) available on the Internet or financial websites. This is mostly the case for small and micro-cap companies.Researching such companies with low visibility can be a daunting task for investors. In addition, information manipulation is also likely if you cannot cross-reference the data or when reference sources are not reliable. Therefore, avoid less visible companies.