The biggest aim of investors, when they consider asset classes, is to realise robust returns on their investments. If you are looking for investments that can beat inflation while also providing good returns, one option is to start investing in the stock markets.
Many investors have earned solid profits by riding the bull market run fuelled by investor sentiment but that is not always the case. Many investors fail to realise that while entering the stock market is simple, it may not always be financially viable to sustain for the long term.
In most cases, there is a good intention, but a lack of necessary financial education jeopardises the chances of profiting from stock market movements. The stock market follows a set of rules that are largely ignored by most people, particularly new investors, so here are five things you should keep in mind, before beginning your stock market journey.
Learn how to pick companies and not stocks
Remember, you become a partial owner in a firm when you buy a share of its stock. Do not rely on guesswork or tips when buying or selling stocks. Learn to evaluate the fundamentals of the market, as well as the listed companies.
Making predictions about the next possible share market movement while putting your money in it will only lead to disaster. You might occasionally be fortunate, but not always. The first step is to learn about the market and understand how it functions.
Start slow and build up your portfolio gradually
Begin your stock market journey by making small investments and gradually increase your investment as you gain more knowledge and confidence in your abilities. Do not invest all of your earnings and savings at once because, as is frequently said, greed and over-confidence can lead you to make colossal mistakes. That is why you should always diversify your holdings, meaning that you should never invest all your money in just the market. The risks associated with stock investments are numerous, and there are no guaranteed returns, so always be cautious.
Keep a check on your emotions
Logic and rationality are two things you must maintain when investing in stocks. Do not become too attached to any one company. Keep your emotions at bay when making stock decisions. Many investors have lost money due to their inability to control their emotions so they break the cycle of fear and greed.
Do not invest in speculative or unknown companies, enticed by their fantastic performances in the past, unless you understand the risk involved. In a bear market, don't panic and sell your stocks at rock-bottom prices.
Never invest your entire corpus in a single stock or sector, however positive you may feel about its performance. Create a well-diversified portfolio to help you reduce risk and avoid losing money in the case of underperforming stocks. It is equally important to avoid over-diversification because going over the optimal point will prevent your investment from witnessing effective growth.
Avoid leveraging and timing the market
Leverage refers to the use of borrowed funds to carry out your stock market strategy. While it may appear to be a good decision when the stock market is rising, consider what would happen when the market or your stock falls. Your loss would not only erode your initial investment but also require you to repay the funds you borrowed, causing a double loss. Limit your risk when you first start out to ensure you can profit in the long run.
Further, remember that no one can successfully and consistently time the market by identifying tops and bottoms across multiple businesses or stock market cycles. To average the market and gain over the long run, you should invest small sums of money, over a longer period of time.
Long-term investors who invest in the right stocks consistently generate exceptional returns. As a result, patience and a disciplined investment approach are advised, in addition to maintaining a long-term goal.
To conclude, dealing with stock market volatility is a skill that should be acquired through education, experience, and perseverance. Instead of taking unnecessary risks with your money, you should treat the stock market like any other business.
Expectations must be realistic, and proper strategies, such as deciding what to buy and when, should be in place. Affinity for a particular stock should not be mistaken for unwarranted loyalty, meaning that you should be prepared to sell your stock holdings when necessary.
Mr. Raghvendra Nath, Managing Director of Ladderup Wealth Management