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Basic rules for investing in stocks

Last few years have been very easy for the investors to make money out of markets. Thanks to solid bull run. But situation has changes both globally and locally as well. This all started with US sub prime issue. This market correction has bought many of the investors back to basics and class room to review their stock selection strategy



Set a ceiling for exposure to a particular stock



You must set a maximum limit for exposure to a stock as over exposure can prove disastrous in a struggling market. In your portfolio, the value of RIL shares is around Rs 1.58 lakh, that's an upside of 108.7 per cent from your cost price. The rapid appreciation of the stock's price has resulted in it cornering 32 per cent of your portfolio. Consequently, one-third of your portfolio is dependent on just one stock. It would be great if you could moderate your risk by reducing your exposure to RIL.



Avoid small holdings



The price movement of the stock should never be the sole reason for buying it. You must have a sound reason for investing in a particular company. And once you do, try to have a meaningful exposure to each without going overboard. Your portfolio consists of 22 stocks, with just three losers. But 12 of your 22 stocks have an allocation of less than 3 per cent. You've missed out on enormous gains from stocks like IFCI just because of your small and negligible holding (under 1 per cent). Such stock holdings add little value to the portfolio and instead makes monitoring a more tedious job.



Book profits occasionally



If you plan to book profits occasionally, you must set a target price for your stock. This is another reason why you must have a meaningful position. If you do, you need not sell the entire holding. By adopting the strategy of booking partial profits, you can sell 20-30 per cent of your holdings on every price rise. Should the market tank and the price of the stock fall, you can re-enter at a lower level. Should the market rally, you can benefit from the upside by offloading portions of your investments at a later date. Whichever way the market moves, you win.



Limit the exposure to a particular sector



Just like a diversified portfolio is needed in stocks, the same holds for sectors. It must not be skewed towards one. In your case, 35 per cent of your portfolio comprises of energy stocks. Such high allocation to a single sector can make your portfolio look weak when the energy sector turns bearish. Hence, it is advisable to reduce exposure to energy stocks and move to some other sectors to make your portfolio more diversified. The practice of being exposed to various sectors makes the portfolio more resistant if a particular one underperforms.



Review periodically



When investing directly in equities, you must monitor your investments regularly. In a mutual fund, your fund manager does that for you. Keep a tab on policy changes and tax issues affecting the sector. If the sector outlook gets bearish, it would adversely affect your investments. But, if you are convinced about a company's future prospects, you should remain invested in it irrespective of its short-term price fluctuations. You can use the Value Research Online Portfolio service. It will help you keep a track on your investments as well as analyze your sectoral compositions.



Following the above rules will ensure that you have a well balanced and diversified portfolio.



But if you want to speculate, then it is another ball game. Our advice: Tread cautiously. Limit, say, 10 per cent, of your investments to speculate on stocks. Don't try it with all your holdings

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