As far as the means of investment that can beat inflation are concerned, nothing can beat the stock market. Investing in stock markets is also a great way to generate wealth, for yourself, and even for your future generations. However, making money in the share market isn’t completely straightforward. You will need to learn its workings and conduct some in-depth research and analysis of the stock you are going to invest in, among other things. Stock markets can also be very volatile at times. One of the best examples is what happened with the recent COVID-19 pandemic. It crashed spectacularly when the pandemic started shutting countries down. However, it has eventually recovered as the infection rate has slowed down. However, nobody was able to predict the market’s performance during this time. Just knowing about the best stocks to buy in India wasn’t enough. Events like the COVID-19 pandemic do a great job showcasing the sheer volatility of the stock market. In order to use the stock market to fulfill your financial goals, you need to approach it more meticulously. Plan well and make a proper strategy before investing anything. In this post, we will take a look at some of the important share market tips to keep in mind before you start investing. Let’s get started.
Here are Some Share Market Tips for You:
Understand Your Investor Profile
All investors are unique and they usually have specific financial goals. Investors with different investment goals such as buying a car instead of a house will need to invest in a different way from each other. It doesn’t require great investment expertise to come up with that. To formulate a sound strategy, think of the answers to these questions:
What are your Financial Goals?
Are you building a retirement corpus? Do you want to purchase a house? Do you want to save for your kid’s education? Your financial goals will help you decide upon the time frame of investment and risks you might want to take.
How Long Can You Stay Invested for?
Historically speaking, stock investments generate good returns over the long-term. Because of that, a 10 year investment horizon is considered to be good. However, in case you want to get some short term returns, you can diversify your portfolio accordingly, so that your goals are fully met.
What is your Risk Tolerance?
To invest in the stock market successfully, you need to be able to take some risk. To not blow all your money away over a risky investment, you should also be able to gauge your risk tolerance. Everyone’s risk tolerance is different, so don’t look at others to gauge your risk tolerance. After you invest in the stock market, your principal amount is exposed to many different types of risks such as market risk, liquidity risk, concentration risk, inflation risk, etc. These risks indicate the possibility of losing a part of your invested capital due to various reasons. Always remember, Higher Risks = Higher returns and vice versa. It’s crucial for you to know what your risk tolerance is. Don’t push yourself beyond the tolerance limit. This usually leads to emotional decisions which end badly.
Use these questions to start building your investment plan.
While avoiding risks entirely is not possible, you can create your portfolio in such a way that your risk exposure is offset by investment tools that are less risky. Diversification is nothing but the process of investing in securities that have zero or low correlation with your portfolio. What that means is that one security’s performance doesn’t have a profound impact on your entire portfolio’s return. You should look to diversify your portfolio across asset classes such as equities, debt, gold, commodities, real estate, etc. Within each asset class, you need to ensure maximum diversification as well. Here are some of the ways to diversify your stock investments:
- Based on Market capitalization – In the simplest terms, market capitalization denotes the size of the company you are investing in. While purchasing stocks, ensure that you buy stocks of large, medium, and small companies. Large company stocks tend to be less risky than those of smaller firms.
- Based on Industrial sectors – Many first-time investors usually invest their hard earned money with companies that belong to the sector they are in. Software engineers might be more inclined to invest in other tech companies. This isn’t always a bad thing since he will have a better understanding of the industry. While tech companies do well in general, putting all your money in one sector might cause you huge losses if that sector suffers a downturn.
- Based on Countries of origin– Stock markets are not immune to changes in the political and macroeconomic situations in the country. Investing your money across companies from different countries is a good way to diversify your portfolio.
Be Careful Before Using Borrowed Money to Invest
A lot of first-time investors start a margin trading account with the help of money lent by the brokerage firm in order to invest in the stocks. This can be as much as 50 percent of the stock’s purchase value. On the surface, this seems quite lucrative but the risks are way higher than the rewards. Leverage is something you should only start using as an experienced and seasoned investor. While starting out, try to limit your risks a little and don’t go all out. Long term profit is what you should aim for. Many investors tend to ignore this tip and continue investing recklessly on borrowed money. Don’t be like them.
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Avoid Emotion-Driven Investment Decisions
The COVID-19 pandemic led to a major market crash and lots of investors tried to cut their losses by quickly selling off their stocks. It might have seemed practical at that point of time, it was not an informed decision but an emotional one, a response to a negative scenario. It ended up making things worse in the long run.
Fortunately, the markets have started recovering and performing well. While some companies suffered due to the economy just freezing up, stocks of fundamentally strong companies survived the crisis and are well on their recovery path as of today. Investors who didn’t panic and analyzed their stocks well before just dumping them have profited from the situation.
Stock markets are volatile by nature. So don’t make investment decisions based on market volatility. Come up with an investment plan and stick to it while making minor changes based on data-driven analysis. Emotion-based decisions never help.
Don’t Waste Effort on Tying to Time/Predict the Market
Speculation and guess work are two things that successful investors don’t partake in. Analyzing data is the key to successfully predicting a stock’s performance.
Most new investors approach stocks with a straightforward approach: buy low/sell high. While this does help to get some quick profits and saves the effort of researching the company or going through pages of financial statements, etc.
However, this approach is extremely dangerous as the investor is forced to guess the lows and highs. Getting some good fortune occasionally doesn’t justify this as an investment strategy over the long-term.
In fact, some of the biggest losses suffered in the stock market are by people who have tried to time their buying/selling with their speculated highs/lows. Avoiding this approach is highly recommended. Invest systematically in stocks. That usually works out even when the market falls. Never decide upon your investments based singularly on stock prices. Keep the firm’s long-term financial performance in mind before purchasing its stocks.
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Don’t Follow Market Trends or Experts Blindly
How do you arrive at the decision to buy/sell shares? Don’t just blindly listen to finance gurus on Tv or clickbait videos on YouTube which talk about how someone made a million dollars in one month via trading. Research thoroughly and take every advice with a pinch of salt. It’s your money after all. Most investors tend to react to any changes in market conditions. The fidgety investor will buy in bulk when the markets surge and will start selling after just a few days of a falling market.
Never follow advice or trends without analyzing them yourself. That’s also a rule to live by in general. Hence, ensure that you make decisions without being influenced by these factors.
Have Realistic Expectations
While stocks undoubtedly generate more returns than almost every other kind of investment tool, they are not going to make you a billionaire overnight. Realistically speaking, people can expect returns in the range of 15-25% in the long run. However, the world is full of people who claim to have earned 100-200% returns. While such freak scenarios are possible, they are highly unlikely to happen to everyone. So, remember to keep your expectations realistic when you invest in the stock market.
Monitor Your Investments Regularly
A stock market is a volatile place. Every major event happening in any part of the world impacts the performance of stocks in all countries. A Chinese-American trade battle affects stock markets in India as well. Political changes in the country also lead to a reaction from the stock market. Practical stock investors should keep track of all major global and national events and rebalance their portfolio as needed.
By virtue of their flexibility, liquidity, transparency, and a highly regulated environment keeping fraudsters at bay, stocks have been among the most preferred avenues for most investors for a long time. Investing in stocks definitely helps you create wealth, but you will need to dedicate the required time and research in the process. You shouldn’t wait till you grow old to start investing in stocks, you should start as young as possible, learning more and more along the way. Always remember, investing in stocks is not a type of gambling. You aren’t blindly throwing your money away. Yes, there are risks, but they have to be calculated risks and your decisions have to be properly informed ones. Don’t just listen to every random person’s tip when it comes to investing in the stock market. Do your requisite research and make informed and calculated decisions. Use these share market tips on your journey towards becoming a successful stock market investor.