Never judge a stock by its share price

Just because the price of a stock is higher than another does not mean it is doing well. For example, a single share tyre maker MRF is priced at over Rs 65,000 while RIL (Reliance Industries Limited) is priced at Rs 1,086 a piece. The former is not even a Nifty 50 listed company. The pricings are based on the number of shares that the company decides to issue and its net worth.

Cycles of market fall and boom

Financial crisis or boom in the market comes in cycles. Most individual investors tend to chase a rising graph and sell off a falling stock. This is a common and wrong notion with which you will end up purchasing a stock at its peak or sell off at its low. You should instead invest in a stock after its price has corrected comfortably and wait for it to grow.

Now, this investment should not be made blindly. Understand the cause for the slump in the share value. If it was from a negative effect of a crisis in a peer company, like in the case of IL&FS, all NBFCs stocks were dragged down. Therefore, when you invest in individual stocks, look at the company performance and its growth prospects.

Do not be excessively bearish

While investing all you have on stocks is risky, not investing at all will rob you of some really fruitful investment opportunities. Additionally, if you see markets or a stock performing badly for no reason, do not withdraw without understanding the cause of the fall. This could simply be a temporary effect.

Studies have shown that those that stay invested in a company for time periods as large as 5 to 10 years earn way more than any fixed investment could fetch you. This is because you are investing in the performance of a company, and it will take time for it to grow or expand. In fact, large-cap companies grow at a steady rate.

Understand the company's business

When you decide to get invested in a share, do some homework on the business of the company. You need to ask question like -How much potential of growth does it hold? Has it turned its loss making sectors into profit by branching out? How the management thinks? etc. Though this might seem like a lot, it is always helpful in the long run.

For example, RIL foresaw its need to diversify and established its stance in the telecom sector rather than remaining highly dependent on its petroleum business for earnings. Will it continue to make its investors happy with improved profits is the question one needs to analyse. Will the losses in the initial quarters of Jio's business be converted into profits in the long run?

Another important aspect to look at is its leverage (borrowed money to make future gains). Excessive leverage have historically proven to be very harmful for companies like IL&FS and Lehman Brothers.

Buy and hold intelligently

While investing for a longer period has proven fruitful, know when to exit. Do not invest and forget. Watch the company's performance. Shares may soar high when it is growing but if the management does not strategize or expand or if there is a serious change in government regulation that could go against the company's business, walk out.