The lure of a big return on capital investments has always thrown investors into the lap of share markets.
However, making money in equities is not easy.
It requires not only oodles of patience and discipline, but a great deal of research and a sound understanding of the market , among other things.
Added to this is the fact that share market volatility in the last few months has left investors in a state of confusion. They are in a dilemma whether to hold or sell, or invest in such a scenario.
So, here are the top 11 share market tips for you to know, before you start investing.
In this article
- 11 Things To Know Before Investing In the Stock Market
- 1. Set Financial Goals
- 2. Take Informed Decisions
- 3. Understand Your Risk Tolerance
- 4. Control Your Emotions
- 5. Portfolio Diversification
- 6. Avoid Borrowing Money to Invest
- 8. Timing the Share Market
- 10. Have Realistic Expectations
- 9. Follow a Disciplined Investment Approach
- 11. Periodically Monitor Your Investment
11 Things To Know Before Investing In the Stock Market
Here are 10 share market tips that will help you in your investment journey.
1. Set Financial Goals
Why are you considering investing in the share market?
Will you need your cash back in six months, a year, 5 years, or longer?
Before investing, you should know your purpose and the likely time in the future you may need the funds.
Consider another investment, if you are likely to need your investment returned within a few years.The stock market with its volatility provides no assurance that all of your capital will be available when you need it.
Remember that the expansion of your portfolio depends upon three interdependent factors:
1.The capital you invest
2.The amount of net annual earnings on your capital
3.The number of years or period of your investment
Ideally, to receive the highest return possible you should start saving as soon as you can and save as much as you can. This should be consistent with your risk philosophy.
2. Take Informed Decisions
You must not and SHOULD NOT take equity investment decisions in a hurry.
Appropriate research should always be undertaken before investing in stocks. But that is rarely done.
Investors generally go by the industry they belong to, or a famous company. However, this is not the right way of putting one’s money into the stock market.
Think your move through. Look at the long-term. Always tread on a goal-oriented approach. You might reflect that redeeming your money is a good option, but it may not be.
3. Understand Your Risk Tolerance
One of the biggest obstacles faced by equity investors, is a poor understanding of their risk tolerance.
The simplest definition of risk tolerance is a strength of mind of how much risk you are willing to take, with respect to your investments including risk to the principal amount invested.
Risk tolerance is a psychological trait that is genetically based, but positively influenced by education, income, and wealth (as these increases, risk tolerance appears to increase slightly) and negatively by age (as one gets older, risk tolerance decreases).
How you feel about risk and the degree of anxiety you feel when risk is present is your risk tolerance.
In common practice, younger persons who have less family responsibilities are more risk tolerant as compared to persons who have greater family obligations or are closer to retirement age.
You should shape your investment portfolio depending upon the level of risk tolerance that is satisfactory to you.
For instance, equities are classic high risk – high returns investments, while debt investments on average have a lower level of risk while featuring comparatively lower returns.
During periods of financial improbability, the investor who can retain a calm head and follows an analytical decision process perpetually comes out ahead.
4. Control Your Emotions
The biggest barrier to stock market profits is lack of ability to control one’s emotions and make logical decisions.
Many investors have been losing money in stock markets due to their lack of ability to control emotions, above all fear and greed.
In the short-term, the prices of companies reveal the combined emotions of the entire investment community.
When a majority of investors are worried about a company, its stock price is likely to decline and when a majority feel positive about the company’s future, its stock price tends to rise.
A person who feels pessimistic about the market is called a “bear,” while their optimistic counterpart is called a “bull.”
During market hours, the constant battle between the bulls and the bears is reflected in the constantly changing price of securities.
These short-term movements are driven by rumours, speculations, hopes and emotions, rather than logic and a systematic analysis of the company’s assets, management, and prospects.
5. Portfolio Diversification
As an investor, you should always look to expand your portfolio and limit your exposure to a specific type of investment.
The widely held way to manage risk is to diversify your exposure.
Wise investors own stocks of different companies in different industries, sometimes in different countries, with the hope that a single bad event will not affect all of their assets or will otherwise affect them to different degrees.
There are 3 major categories of stocks within a particular sector of industries:
|Large cap stocks||Risk is lowest when you choose to invest in stocks of large well-established companies|
|Mid cap stocks||Risk gradually increases as you shift towards stocks of small companies|
|Small cap stocks||These stocks are highly risky|
Through diversification, the individual risk of each type of investment or revelation to a particular type of investment can be minimized by the investor.
Diversification of portfolio across asset classes and instruments is the key factor to produce optimum returns on investments with minimum risk.
Level of diversification depends on each investor’s risk-taking capability.
6. Avoid Borrowing Money to Invest
In a margin account, banks and brokerage firms can lend you money to invest stocks, more often 50% of the purchase value. Avoid this kind of leverage to invest.
Let me explain why.
Let’s say if you wanted to buy 1000 shares of a stock trading at Rs. 100 for a total cost of Rs. 1,00,000, your brokerage firm could loan you Rs. 50,000 to complete this purchase.
Suppose the stock moves to Rs. 200 a share and you sell it.
If you had used your own money exclusively, your return would be 100% on your investment [(Rs. 2,00,000 – Rs. 1,00,000) / Rs. 1,00,000].
If you had borrowed Rs. 50,000 to buy the stock and sold at Rs. 200 per share, your return would be 300 % [(Rs. 2,00,000-Rs. 50,000) / Rs. 50,000] after repaying the Rs. 50,000 loan and excluding the cost of interest paid to the broker.
It sounds great when the stock moves upward but think about the other scenario.
Suppose the stock falls to Rs. 50 per share rather than doubling to Rs. 200, your loss would be 100% of your initial investment, plus the cost of interest to the broker [(Rs. 50,000 – Rs. 50,000) / Rs. 50,000].
Leverage is a tool best used after you acquire experience and confidence in your decision-making abilities. Limit your risk when you are starting out to make sure you can profit over the long term.
7. Avoid Herd Mentality
It’s true that emotions and not logic rules the common investor’s decision making.
History suggests that large groups can be incorrect but we refuse to believe it. A typical investor’s choice is usually influenced by the actions of his relatives and acquaintances.
When markets rise constantly, majority of investors speculate that it will reach further highs and they continue to boost their investment.
Another herd way of thinking keeps you out of market bottoms. Herd mentality prevents you from buying at the base as panic hits the market and most of the investors are stating that market will crash more.
The world’s best investor Warren Buffett was certainly not wrong when he said, “Be fearful when others are greedy, and be greedy when others are fearful!”
So, do not follow the herd blindly when making mutual fund investments, instead research the prospective fund before you sign up for share market investments.
Financial analysts themselves say it is ineffective. In the words of Warren Buffet,
“Market predictions can distract investors from making good stock purchases”
It’s a waste since not only do you miss out on very good investment opportunities, you also miss out on buying the units at a lower price.
If you enquire with me or any other expert for that matter, they will tell you that investing when the market is low is most likely the best, because, this is when you can apply the concept of ‘buy low, sell high’.
So, you should by no means try to time the market.
In fact, nobody has ever done this productively and consistently over multiple business or stock market cycles.
Catching the tops and bottoms is a myth. It is so till these days and will remain so in the future.
In fact, in doing so, more individuals have lost far more money than people who have made money.
10. Have Realistic Expectations
Hoping for the best from your investments is never wrong, but you could be heading for trouble if your financial goals are based on unrealistic assumptions based on the past performance of stocks.
For instance, lots of stocks have generated more than 100% returns during the great bull run of recent years.
But, it doesn’t mean that you should always expect the same kind of return from the stock markets.
9. Follow a Disciplined Investment Approach
In times gone by it has been witnessed that even great bull runs have shown bouts of panic moments. The instability witnessed in the market has unavoidably made investors lose money despite the great bull runs.
However, investors who put in money methodically, in the right shares and hold on to their investments patiently have been seen generating terrific returns.
Hence, it is prudent to have patience and follow a well-organized investment approach.
11. Periodically Monitor Your Investment
It is very important to monitor your investment and review it periodically, as an important event happening in any part of the world does have an impact on the stock market.
Also, any financial event related to a particular company or sector impacts stock price.
Equity investments traditionally have enjoyed a return significantly above other types of investments while also proving easy liquidity, total visibility, and active regulation to ensure a level playing field for all.
Investing in the stock market is a great chance to build large asset value for those who are willing to be consistent savers, make the necessary investment in time and energy to gain experience, correctly manage their risk, and are patient, allowing the magic of compounding to work for them.
The younger you begin your investing avocation, the greater the final results, just remember to walk before you start to run.
Disclaimer: The views expressed in this post are that of the author and not those of Groww