3 simple rules to make money in stocks

Try these and see how you will create wealth in the long term.

Do you want to make money in equities?

Or do you want to talk about many shares trading in the stock market?

You must be clear about these two questions.

Recently I met somebody who wanted to invest about Rs 10 lakh to 15 lakh. I gave him 3 to 4 names. He wanted more. He wanted about 8 companies in which he would invest Rs 15 lakh -- about Rs 2 lakh per company.

And he had no clue why. I was asking him to buy shares in Bharti Airtel, Reliance.

One person buying 2,000 shares would have done nothing to the price of the share, but he was not in a mood to put more than Rs 2 lakh in shares of one company.

I showed him portfolios with 50,000 shares of big companies where people had invested Rs 30 lakh to Rs 1 crore in one company; but he could not fathom something like that.

It is not easy to build a portfolio, but you cannot be looking for 8 companies if all you have is Rs 15 lakh. Maximum this portfolio should contain is about 4 to 5 shares. My take: of course each one of us is different.

Here's what is required to make money in the stock market...

1. Low entry costs

I have entered in many stocks at very low levels and would stick to them even during a bad period.

The sheer dividends makes it worthwhile to do so. For e.g. I have NTPC bought at Rs 90. It allows me to sell, buy back, etc. but the willingness to hold comes from the low cost -- which means there is a very decent dividend yield which is the reward for holding.

2. Low price earnings

Apollo Hospital, Coromandel International, EID parry, Cholamandalam Finance, Shriram Transport Finance (exited much earlier), VIP Industries, etc. in my portfolio were yield shares not very long ago. It will still work, and please do try the same.

3. Insider buying

When executives (and owners) buy big time, it is a good indication of it being a good buy. However, you should do your own research -- there are some stupid managers all over the world.