The stock market can help you make a lot of money, but you can lose all your money if you are tempted to invest randomly without knowing the nitty-gritty of the market.
Here’s what you need to know about the market:
- Never jump blindly into stock markets:
Many times it happens that while talking to your friends and colleagues, the discussion heads towards the stock market, and also how the stock market helps investors make big money. You might never have invested in the market, but after hearing about all those things you also decide to buy some stocks. However, if you entered the market just to remain in the mainstream fashion, you have landed in for the wrong reason. You should invest in the stock market after getting the basic knowledge about it and in accordance with your financial goals.
- Stock market is not a money-making machine:
You must have heard the story about 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. While it is true that a lot of investors have made profits through the stock market, you should keep it in mind that it was only possible because they had good market knowledge, made some really smart choices by adopting carefully thought of strategies, and were 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.
- Educate yourself, handle basics first:
Before making your first investment, take the time to learn the basics about the stock market and the individual securities composing the market. There is an adage that says: It is not a stock market, but a market of stocks. Your focus will be upon individual securities which you are investing in and the relationship with the broader economy and the factors that drive your stock. Some important areas which you should be familiar with before entering the market are:
- Understanding financial metrics and definitions such as PE, EPS, ROE, Market Cap and so on.
- Popular Methods of Stock Selection and Timing, such as fundamental and technical analyses.
- Trading basics, rules, compliances and terminology as market order types including market orders, limit order, stop market orders, stop limit orders, trailing stop loss orders, and other types commonly used by investors, margin money required if you want to trade in F&O.
- Gain some understanding about the market and its relationship with the economy such as market relationship with inflation, GDP, fiscal deficit, crude prices, rupees values against dollar. People lose money in the markets because they simple jump to the market without understanding the economic and investment market cycles.
- Invest only your surplus funds:
The biggest mistake newbie 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, such as systematic risk that you can’t avoid, 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. If you want to take risk in the stock market, it is advised to 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.
- Diversify, but refrain from over diversification:
It is advisable to not put all your money in one stock. First, you can create a well-diversified portfolio of stocks that can help you reduce risk and save you from losing money if a few stocks do not perform well. However, it is important to avoid over diversification, because if you don’t have a certain number of stocks, your investment can’t get the proper growth moment.
- Don’t let emotions impact your investment:
Separate your emotion from any stock as many investors end up losing money in the stock markets due to their inability to control emotions. Get rid of the fear and greed cycle. Do not invest in any speculative unknown stock lured by its past fabulous return without understanding the risk involved that can lead you to suffer loss. In a bear market, control your fear, don’t panic and sell shares at rock-bottom prices. Thus, fear and greed are the worst emotions to feel when investing, and it is better not to be guided by them.
- Have realistic expectations
Hoping for the ‘best’ from your investments is not wrong, but you could be heading for trouble if your financial goals are based on unrealistic assumptions. For instance, lots of stocks have generated more than 100 per cent returns during the great bull run of recent years. However, it doesn’t mean that you should always expect the same kind of return from the stock markets. If you feel that stocks in your portfolio are overvalued, it is better to switch to a relatively low value good stock.
Lastly, it’s important to monitor your investment and review it periodically as any important event happening in any part of the world does have an impact on our financial markets. Also, any news or financial event related to a stock or industry impacts that stock
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