Things to keep in mind while Investing in Stocks

You now know about the different financial instruments that are traded in the Indian stock market. Here are some thumb rules that you should keep in mind while investing.

1. Never Buy or Sell Stocks Blindly

You may be new to the stock markets, but don’t depend entirely on advice from friends, colleagues, or family members. While you can certainly take note of their suggestions, do your own homework too. Take a look at the company’s fundamentals, study its price charts, and check on related news before investing.

2. Unrealistic Expectations

The stock market can fetch good returns, but only if you invest and trade wisely. It is important to keep your expectations realistic. How can you do that? Begin by setting up a stock market strategy for each stock that you invest in. This will ensure that you book profits in a timely fashion and are able to cut losses when a trade moves against you.

3. Educate Yourself

Know the share market basics before you start investing. This means getting familiar with the market terminology and gathering in-depth knowledge about the company stocks you wish to invest in. When you are familiar with the workings of the company, you will gain a better sense of when to buy and sell its stocks.

4. Avoid Leverage

The golden rule of investing in the stock market is to invest only what you can afford to lose. This means you should always account for the worst-case scenario. Margin funds can give you the leverage to invest much higher amounts. But keep in mind that stock prices could plummet at any time. If you are over-exposed when this happens, you could face massive losses.

5. Diversify Your Portfolio

Don’t put all your money in just one stock or sector. Spread your capital across multiple stocks and sectors to diversify your portfolio. This will minimise your risk and save your capital from getting eroded just because a few stocks did not perform well. A good diversification strategy could help you generate good returns in the long run.

6. Don’t Try to Time the Market

Even seasoned traders stay away from trying to time the stock markets. That’s because it is not always possible to pick the exact tops and bottoms of a stock price movement. It is better to adopt a disciplined investment approach and set up a clearly defined financial plan. Analyse the fundamental and technical aspects of the stock to identify suitable price points at which to enter and exit a trade.

7. Control Your Emotions

Greed and fear are said to be the worst enemies of a stock market investor. Sometimes, you might hold on to a stock for longer than is wise simply because you’re hoping for higher profits. Or, you might sell in fear because everybody is panic-selling their shares. Keep these impulses in control and follow your trading strategy closely to generate good returns and keep losses at a minimum.

8. Know Your Risk Appetite

Identify how much risk you can afford to bear before you start investing in the stock market. This will help you to invest in shares according to your risk appetite. For example, conservative investors could focus on large-cap stocks, which are relatively stable in volatile conditions. Meanwhile, investors who can bear some risk could look into small-caps and mid-caps, which can be risky but also have a higher potential for profit.

9. The stock market is not a money-making machine

You must have heard the story of many investors who made their fortune through the market. Many believe that the stock market is like a money-making machine, which can turn them into millionaires over a period of time. Well, it is true that a lot of investors have made profits through the stock market. But it was only possible because they’ve good market knowledge, made some really smart choices by adopting carefully thought of strategies, and are also much disciplined in their approach. Many people forget that a lot of people have lost their entire wealth, while some have been forced to sell their personal assets to cover the loss in the market.

10. Invest only your surplus funds

The biggest mistake new investors make is to invest money that they can’t actually afford to lose. Investing in the stock market is risky, and that means that you can potentially lose everything. Like any investment, there are inherent risks associated with the stock market. Some are the risks related to the overall market as the systematic risks that you can’t avoid by diversifying your portfolio, while some risks are stock-specific that you can avoid. You need to decide your own risk tolerance considering your age, financial strength, retirement goal, etc, and accordingly should take the risk. If you want to take risks in the stock market, then only invest your surplus funds which you can afford to lose. Investment is done to generate more money, but do not invest all your emergency funds in the stock market.