Investing in the share market is a rewarding experience. But it requires discipline. This discipline comes from understanding what is ‘right’ for markets and companies. And this definition of right is nothing but wisdom one gathers over a period of time. For instance, investing in a cement company when its earnings will be low in the monsoon quarter will be a sensible idea. This is because constructions activities are low in the monsoon quarter. Hence, it is important that one studies and invest in ‘right’ businesses on ‘right’ time.
To achieve this, there are certain practical ideas one can follow to increase the possibility of investing in the right way. Here are a few things you need to follow when you start to invest in share market:
Know your financial goals
If you start a journey, then you need to know two things. One is the destination first. And the second is the right vehicle. You should know why you want to invest. If you decide it beforehand you can accordingly plan your trades or investments. You can also exit your investments if your goals are achieved. Stock market pays you if you have a long-term vision.
Asses your risk profile
It is important to know how much you can lose when investments fail. When you invest in large stocks they are relatively less volatile. In CY2008, the Nifty 50 index halved and in March 2021 it lost around 30 percent. But if you are investing in small-cap stocks then you should know that many small cap stocks have lost as high as 80 to 90 percent. Trading using derivatives can be rewarding. But it can also destroy your capital in no time given the risk and the leverage involved. Hence, risk management in share market helps in understanding the scope and limits of your investments. In markets, knowing the limit is a key thing which helps in saving a lot of capital.
Keep emotions at bay
When you are investing in a business (by buying a stock) there is little scope for emotions. So is the case when you are trading a stock for a pre-determined risk-reward. If your investment premise is not working out or it is nearing stop loss, it is time to exit your position. If you have bought something for a certain price target and the price is not moving at all, then it is time to sell. Stock market rewards discipline in trading and investment activities. But you need to control your emotions and biases. One must not be utterly pessimistic or overly optimistic. The only way to deal with emotions is by being practical and not greedy.
Avoid tips
While social media and news media can be a good source for information, solely relying on them for investment success is not a good idea. Also do not trade based on tips. You have to generate investment ideas based on your own research and study. This may take time. But over a period of time it can help you create sustainable wealth. You may use social media or other tools to validate your investment premise. You may also consider seeking professional advice if you are stuck. But you must not follow anyone blindly.
Money management
There are two aspects to managing one’s money. First do not borrow to invest or trade. Though leverage amplifies the outcome, it can also put you under pressure. It is not easy to generate consistent returns and there are times when investments may not be generating cashflows for you. Hence avoid taking loans to invest.
Second and more important aspect to managing money is to divide your capital and spreading it. It leads to diversification and reduces risks. If you put all your money in one trade, it may incur loss. This can be avoided if you spread your investments in various avenues: stocks, bonds and commodities.
Lastly, when you are investing in share market, you should prepare a plan and keep reviewing your progress against it. It helps to stay course and achieve your financial goals.