Concerned about what to know about stocks before investing? Well, there are quite a few things that you should know before taking the plunge into the Indian stock market. If you are wondering what to do before investing in a stock, then you should go by some of the pointers listed below. These inputs will give you a better idea of what to expect once you start investing in stocks and how you can prepare yourself accordingly for the challenges that lie ahead.
Things to know before investing in stock market India
When it comes to stock market investments, you should ideally look to maximize the value of stock investments so that you can comfortably outstrip inflation rates while accumulating a solid corpus for the future. Nowadays, it is easier to invest in the share market with help from mobile apps like Groww which can give you plethora of options for growing your wealth in the long run.
Here are the key things that you should keep in mind:
- Do not make a blind jump into stock investments- Many people make the mistake of blindly plunging into the after hearing about stock market investments made by their friends, colleagues or family members. You should invest after garnering basic knowledge about the sector and making sure that the investment is in sync with your financial goals.
- Stock markets are not money-machines or overnight wealth creators- You may have already heard success stories of several people who have become overnight millionaires or amassed sizable wealth after investing in the stock market. While these stories may be true, there are several other true stories of people losing all their money in the stock market as well. Stock markets are not automatic wealth creators. They require knowledge, hard work and perseverance for investors to succeed.
- Learn about the basics at the outset- You should take your time with regard to understanding the basics of share market Make sure that you focus upon individual securities, how they are linked to the economy, financial aspects like ROE, PE, EPS, market caps and methods of selecting and timing stocks. You should learn basic rules of trading along with all compliances and market terminology as well. Understand how the market reacts to factors like the GDP, inflation, foreign exchange fluctuations, fiscal deficit, crude rates and so on.
- Use only surplus funds for investments- If you are planning to invest in the stock market, make sure that you deploy only surplus capital in hand for the same. A big mistake will be investing money that you cannot afford to lose or go without for days. Stock market investments come with risks and you can potentially lose all your money or book profits. Do not dip into your core portfolio of investments or savings for making these investments. Use surplus funds. Make sure you weigh your risk appetite, financial position, age, retirement goals and other factors before taking these risks. Do not compromise your emergency funds for these investments.
- Leverage should be carefully understood- The term leverage basically means using money which is borrowed, for executing trades in the stock market. Brokerages and banks may lend money for stock purchases. This may look good when the market is rising but in case of sudden falls or fluctuations, your losses will eat into the initial corpus and you will also have to repay interest to the broker/bank. Do not use leverage initially.
- Herd mentalities do not work- A herd mentality where you follow the strategies of several people or commonly used techniques, may not work for you in the stock market. Do not delve into strategies of people you know or go for a particular stock because everybody is choosing the same. Rely on your own analysis and expert insights instead.
- Diversification needs the right balance- Do not put all your eggs in one basket, i.e. all your investments in a single stock. Build a portfolio that is diversified across multiple stocks for spreading out and reducing overall risks. If even a few stocks do well, you will be safeguarded from major monetary losses. However, do not diversify beyond a particular number of stocks.
- Discipline is always the key- Instead of timing the market and risk losing your hard earned surplus funds to fluctuations, focus on a disciplined strategy instead. Invest money in smaller amounts over a sustained period of time and aim to reap benefits in the long run. Those who invest in the right stocks over a sustained duration are more likely to get superior returns.
- Emotions are best kept away from investing- Emotional investment strategies mostly backfire or get out of hand. Keep your emotions away from specific stocks. Do not invest in any unknown stock which has given excellent returns earlier, without carefully analyzing the risks. In bearish markets, control anxieties or fear and do not panic and sell off stocks at immensely low prices. Remember that greed and fear are emotions best kept away from your investment journey.
- Always keep your expectations at more realistic levels- You should have practical and realistic expectations from your investments in certain stocks. Several stocks have generated in excess of 100% in returns over the last few years owing to sizable bull runs in the market. However, this does not guarantee that the same returns will always be generated by the stock market. If you think that your stocks are slightly over-valued, shift to comparatively lower value yet decent stocks instead.
You should also know that periodic reviews and tracking of your stock portfolio are really essential. Being well-versed with global and domestic events (ones that may impact financial and stock markets) is also a plus point along with being updated on the latest financial/market news.