Summing it up, doing your homework before getting started with stock market investments is of much significance, considering it would enable you to make intelligent, informed decisions.
- Think long-term To begin with, consider the principal objective and the estimated time period of your investment. Ask yourself what is such an investment directed at; are you contemplating on building yourself a retirement corpus or do you need funds to finance your child’s higher education expenses? Or would you want to leave behind an estate for your dependents, for that matter?
- Know your risk appetite As much as it is a psychological trait, your stomach for risks is generally influenced by education, wealth and income (considering an increase in these three is likely to expand risk tolerance). Perception of risk is important, particularly in investing.
- Get a hold of your emotions One of the bigger obstacles to making a profitable investment is the inability to put a leash on your emotions, considering this is something that can cloud your capacity to take logical decisions. Generally speaking, when a lion’s share of the investor community doesn’t feel good about a company’s prospects, its stock prices tend to fall; and vice versa.
- Get the basics right Do the necessary legwork in terms of your research on the companies and their stocks that you’re planning to invest in. Probe into crucial fundamentals – sales, earnings, profit margins, debt, equity and its stand/recent announcements on dividends -- in order to get a vantage-point view of a company’s financial footing.
While no rule of thumb, you should ideally look at a stock market investment should you have a longer investment horizon in mind. That’s because the stock market, with all its volatilities, would not be able to vouch for capital appreciation (within a short period of time) should there be a sudden paucity of funds.
Moreover, should you know the capital you’d need at a future point in time, it would be easy for you to arrive at the investible amount now and chart down expected returns.
That’s because as you move forward with a stock market investment and get the basics – buying and selling mechanism, degree of inherent volatility and the ease of liquidating an investment – right, chances are you’d then perceive the risks to be lower as compared to when you had just started out. By understanding your risk appetite, you would then be likely to keep off investments that could make you anxious.
Investors who don’t take too positively to the stock market are called bears, whereas their more positive counterparts are called bulls. This constant tussle between these two communities is evident in the way prices of securities fluctuate within one trading day. These short-term movements are fueled by speculations, rumors and emotions, rather than their rational sibling, logic.
So much so, that even if the stock market performs in keeping with expectations, you might still be buried underneath a deluge of questions – should I sell my holding and make a profit before prices fall? Or should I keep my position in the hope that prices might rocket further?
All in all, don’t let emotions drive your actions because chances are you’d end up making the wrong decision. Simply put, while buying a stock, know your objective inside out and have a mental note of expected returns ready. In other words, prepare your exit strategy well in advance but try not to execute it while being purely guided by emotions.
- Understand vital financial metrics – Return on equity (ROE), P/E ratio, earnings per share (EPS) and what they translate to in the real world of stock market investments
- Understand what technical and fundamental analyses are and how they differ from each other
In conclusion, investing in the stock market provides one of the better opportunities to build a large asset value for yourself, considering you save consistently, put in the required time and energy and know how to manage risks. Younger you begin, more would be your financial stability over the years.
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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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