You can invest your money in a fixed deposit scheme, mutual funds, provident funds, real estate, and many more. But there is one area of investment that many have found to be the most appealing and attractive. The reason for its popularity is the potential for high returns that it allows. We are, of course, talking about the phenomenon of stock market investment.
Many will agree that the stock market is a multi-faceted behemoth. There are so many factors that affect the stock market that it is impossible to predict how it will behave, whether the stock price will go up or go down. If one is not careful, the alluring charm of the stock market could result in heavy losses. However, a properly disciplined approach to stock market investment can work wonders for an investor. Thus, it is very important to keep in mind some golden rules when it comes to stock market investment. Read on to know the 10 basic rules of investing that can make your stock market experience a smooth one.
The 10 golden rules of investing in the stock market
Focus on the long term
Yes, we have all heard of the simple formula of entering the market when it is down and exiting it when it is high. Many use this approach to make some quick profit. They buy stocks of a company when it is cheap, and when they feel the stock price has risen adequately, they start selling the shares for a higher price.
This is very common. But the fact remains that such an approach is not so easy to implement, for the simple reason that it is impossible to predict when the stock price will increase, or whether it’s growth has reached the maximum potential. It is possible that a particular stock may increase further, even after one has sold it. So, the investor is actually losing out on further profits because they sold out prematurely.
So, rather than thinking of the stock market as a short term money making tool, think of it as a long term investment option. Buy stocks by keeping long term returns in mind, because stock market investments perform significantly better than other assets in the long run.
Do your homework
Investing blindingly in the stock market, without proper research or a basic understanding of economics is akin to shooting oneself in the foot. Before you invest your money in stock markets, invest some time and effort in understanding how the stock market works. Learn about economic trends and factors affecting the stock market. When investing in a particular company, it is a must to do some research on the company’s past performance as well as future potential.
The only way to do that is to go through the technical information about that company’s economic performance. Understanding balance sheets, profit and loss accounts, operating margins, earnings per share and other information will help you know how a company is performing. If you’re a newcomer to the world of stock market investing, read articles online that explain how to invest in share market for beginners.
Apart from this, it is also vital to understand the global effects that are acting on the stock market. The stock market is not averse to the happenings of the world. On the contrary, politics and news greatly influence the stock market and if one has a good understanding of this, then they can predict to an extent how the stock market will behave.
Buy and sell at the right price
It is very important to buy stock at prices that you are comfortable to pay. You may find some stocks that are very popular and all your peers are buying some, only that their prices are something that you cannot fit in your investment budget. Skip those. You cannot buy stocks that everybody is buying when you’re not comfortable. Wait for something better to come your way.
Also, when you feel you want to sell your stock and you’re getting good returns, do so. It could be counter-intuitive to wait for the price to increase some more. This will help you make quick decisions when it comes to buying or selling shares.
Diversification of your portfolio is an age-old strategy for stock market investment. It simply means that we should never put all our eggs in the same basket. Investing in just one company or one sector is never a good idea, because if the company doesn’t do well, your investment could depreciate in value. Therefore, it is always beneficial to invest in a diverse portfolio to balance out your investments.
Usually, it is advisable to invest in a combination of small, mid and large cap stocks. Small and mid-cap stocks have the most potential for growth and great returns, but also have some risks associated with them. And large cap stocks are mostly stable with acceptable returns. Therefore, a combination of all three would allow you to invest in stability as well as growth at the same time. Diversification is something that can help you counter the volatility of the stock market.
Stay away from tips and rumors
Stock market investment brings with it a cacophony market tips and rumours from all sides. Your friends and colleagues will bring in tips to buy or sell particular stocks. But many of these are just rumours. One of the most important golden rules of investing is to stay away from these since they could all be untrue. Focus more on the fundamentals of the market and you will be in a much better position to make informed decisions.
Understand business models of companies that you invest in
You should only put your money into companies whose business models you understand clearly. Businesses with sound strategies and clear projections are bound to be financially stronger in the long run. Do not put your money in a business whose strategy you are having a hard time understanding.
Do not make rash decisions
The sudden volatility and unpredictability of the stock market can be a cause for great stress. So, if you find that your stock has fallen suddenly, do not be in a rush to sell it. Take a deep breath and sit back. If the economic fundamentals of the company are sound, then the stock is likely to go up again. The same is true when buying stocks. Do not buy stocks in a rush just because everyone is buying it and advising you to do the same. Herd mentality is quite rampant in the stock market trade and it is best to form your own informed decision.
Never take loans to invest in the stock market
Stock market investing is dependent greatly on how long you’re able to keep the stock. If you borrow money to invest, you are bound to be in a time crunch when it comes to repaying the loan. Always invest your surplus money in the stock market, money that you know you’re not in immediate need of. This way, you increase your stock withholding potential up to the right time.
Invest small and regular
When it comes to stock market investing, it is better to invest small sums at regular intervals rather than one large sum in one go. Smaller investments, other than being cheaper, will also allow you to be flexible with your investments.
Always monitor your investments
Stock market investment is never about investing once and forgetting about it. That may be true for something like fixed deposits, but not for the stock market. Since the stock market is highly volatile, stock prices keep changing along with the changes in the company itself. Therefore, monitoring your investment portfolio is very important to know in time whether you should let go of some stocks that you feel aren’t doing well.
The above golden rules will definitely help you understand how to invest in stock market in India. Understanding the basic concepts of the stock market is key. You will come across many individuals who will offer tips, claim to have a formula and offer guaranteed returns. Simply stay away and focus on the basics. Once you understand the basic rules of investing in the stocks, you can exercise greater control over it. Yet another vital cog in the stock market machinery is discipline. Haphazard investing without the backup of research has resulted in the downfall of many. Practice utmost discipline, patience and consistency, and then you can reap the rewards.
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The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
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