Things to keep in mind when investing in stocks that have seen big price drops
Every time the prices of retail favorite stocks fall, the number of investors who buy the stock goes up dramatically. We saw this with Yes bank, Reliance ADAG stocks, and now with Zomato. Investing is risky & here are some important things retail investors should keep in mind
In the business of investing, if a stock price is down and it seems like it is a cheap buy, odds are, it will continue to become cheaper. The optimal way to trade is to buy stocks that are doing well and sell them higher as they grow.
Avoid averaging down to reduce your avg buy price in the hopes of making a profit or breaking even IF the price goes up.
Yes, there are times when it works, but the issue with this strategy is that one bad trade is enough to wipe out all previous profits & more.
We all suffer from Disposition Bias—we feel like selling stocks that are going up and hanging on to stocks that are falling down. To do well when investing, you need to do the opposite—hold on to winners and sell the losers.
Mix technicals with fundamentals. A stock that seems cheap at Rs 100 for fundamental reasons will seem cheaper at Rs 50, tempting to average down. But technicals will show you if there’s a downtrend—a warning sign to maybe not buy, buy less, or exit.
The most important aspect of investing is to diversify. We live in a world with no status quo. Any company/sector can get disrupted & lose a lot of value. Avoid holding more than 10-20% of any single stock or sector, the lesser, the better. It’s still high but better than 50%.