The pull towards significant profits always makes investors consider financial assets in the stock market. Stock market investments have the potential to offer better returns as compared to fixed-return conventional investments. However, stock market investments can be challenging for new entrants. They need to make some habits and be aware of various pitfalls before investing in the stock market. Find here some of the do’s and don’ts for market participants.
Do’s of Investing in the Stock Market
1. Invest Surplus Funds Only
Stock markets are risky. Therefore, investors considering stock market investments should ensure that they invest their spare funds only. They need to consider the necessary financial obligations before investing in the stock market, like EMIs, living expenses, rent, premiums, etc. Investing the surplus funds after considering such expenditures is safer. Invest only what you can afford to lose without affecting your lifestyle.
2. Define financial goals
Defined financial goals can help investors determine the suitability of an investment in the stock market. For example, penny stocks that have the potential to provide multibagger returns may work for investors with a long-term perspective but not for short-term traders. One can hold stocks in a demat A/C for as long as they want to maximise profits.
3. Determine Risk Profile
Investing in the stock market is risky. Before starting investing, individuals should answer a few questions – what kind of investor one wants to be, investment horizon to achieve financial goals, etc. Investors should know how much risk they are willing to take, how much risk they can take based on their current financial standing, and also the amount of risk they have to take to reach their financial goals. It will help investors to find the right type of investments to include in their portfolios.
4. Learn About the Stock Market
Investors should have a basic idea of trading and investing. They need to learn about the basics of fundamental analysis and technical analysis. They should have an understanding of how government regulations, the company’s strengths or weaknesses, etc., will impact the stock. While considering a stockbroker to open online demat account free, one should check its online trading platform, and research report quality also.
5. Diversify Investment Portfolio
Diversification means investing in various financial assets to reduce risk exposure. There are different types of financial assets in the stock market that investors can consider to make investments, like debt securities, shares, large-cap stocks, mid-cap stocks, mutual funds, bonds, derivatives, and others. In case one investment goes down and decreases the value of the portfolio, the other security can balance it out. Every security has a different risk-to-return ratio. Based on the risk profile, one can choose assets to include in the stock market.
Don’ts of Investing in the Stock Market
1. Do not follow the herd mentality
Individuals may get influenced by the actions of their friends, relatives, and acquaintances. They may follow the herd because they fear missing out on opportunities. But it is not the right approach towards the stock market. Market investors should avoid investing blindly due to the herd mentality if they do not want to bear losses. Practice self-control and make research-based investing decisions.
2. Do not keep unrealistic expectations from investments
One should set achievable targets instead of unrealistic profit targets like ten times or twenty times returns. It is harmful to make unrealistic expectations about stock market returns. Ideally, one should research and know about the market conditions to invest in selected sectors.
3. Do not gamble
Investors just cannot look at the name of a company to make investments or go by the industry it belongs to. Research is the key to picking stocks for investments. Investors must understand a few ratios to know the company’s efficiency (asset turnover ratios), leverage (debt-to-equity ratio), and liquidity (current and cash ratios). They can compare these ratios of companies with the same market cap in the same industry. Considering these do’s and don’ts, individuals can start investing at a younger age as they can afford to take more risks. They have more time and capacity to recover from wrong decisions at a younger age without affecting their long-term financial plans. Early investing in the stock market can also provide better compounding benefits with the reinvestment of dividends. Open a demat account online and start investing based on market learnings.