By Mr. Jyoti Roy, DVP- Equity Strategist, Angel One Ltd
Investing in the stock market can be exciting and scary at the same time. While the returns are luring, the risk factor can be daunting. However, if you are somebody who is planning to venture into the stock market, then one of the first things that might come to mind is to learn the basics of investments in the stock market.
There are examples of people making a fortune and effectively generating a second source of income through a well-managed and directed approach towards stock market investments. However, stock market investments are subjected to market volatility and risk. For a beginner, it is crucial to practice caution and ensure that any decision to invest in the securities is backed by proper research and study.
Here are a few essential points that a beginner should take into account whilst approaching the market for the very first time.
Not over expecting from the stock market investments
Even though a balanced and planned approach in the stock market investments is often rewarding, it is also essential to understand that the market is not a magic wand or a genie. A beginner needs to realise that expecting long-term exponential results could be an incorrect approach to the entire investment journey.
Determining the initial investment
There are different ways for a beginner to initiate stock market investments. Either a lump sum amount could be invested in different shares, or a systematic investment plan could be followed. A fixed amount could be poured into securities such as equity shares and mutual funds. The first step before a beginner is to ensure how much money they would want to introduce in the stock market through any of the two methods.
Determining the investment goal
Even though this advice sounds pretty basic, any beginner must determine the exact objective for taking the big step of entering the stock market. The investment goal of an individual depends on risk preferences and life objectives. It could be a foreign trip or a dream house. It is not vital to have a grand purpose, but its determination before the investment journey could start is crucial.
Understanding different ways of stock market investments
There are several ways through which a beginner could approach the stock market journey. For example, a diversified portfolio could be created consisting of debt and equity securities. The beginner could also take account of index funds which are replicas of indices such as Sensex and Nifty and are operated by many financial institutions. You can also take advantage of Robo-advisors, which many Fintech players have introduced recently. These Robo-advisors are AI-powered mechanisms that take account of historical patterns and performance of individual stocks and suggest to the investors of the expected performance. Since some serious research and quantitative analysis back the advice, it is highly reliable.
Inclusion of diversification in the portfolio
Once again, this point could sound relatively straightforward; beginner investors often miss this out. Bullish sentiment in the stock market could result in upward movements in equities, indices, and derivatives. This could lure beginner investors into pouring more money than planned in the portfolios. However, it is always advisable to stick to the initial corpus that was decided in the first step.
Furthermore, putting all eggs in the same basket might provide a higher return (at times), but more often than nought, it can incur losses. Hence, it is crucial to have a balanced portfolio to enjoy the benefits of diversification. This means putting money in different options such as debentures, bonds (fixed market securities), equities (large, small and mid-caps) and index funds. The proportion of investment in each option is based on individual risk preference.
Avoiding too much risk at the beginning of the investment journey
It is advised to beginner investors to avoid high-risk securities such as futures and options. These derivative securities could incur high losses as there is no downward protection in such alternatives. The investor could lose the entire corpus, which is not possible when a diversified portfolio is created.
Tracking, reviewing, and monitoring the portfolio
Based on the planned period for which the investment is planned, a beginner should always track, review and monitor the securities’ prices and what the companies have been doing. For instance, if an investor has chosen Maruti Suzuki for investment, besides following the stock performance, it is essential to take account of various factors such as industrial and company-related news. This will help gain insights into the market and understand the reasons for price movements.
The stock market investment could be extremely rewarding. However, it is also important to understand that there is no better teacher than learning from your own mistakes. Hence, a beginner should practice caution and enter the stock market in a planned and organised manner. The overall probability of incurring losses could be the least, and the chances of earning a reasonable return are higher.