If you have just started exploring the idea of trading in stock markets, a flurry of jargons, historical data and technical terms may make you feel intimidated. For many, it’s a common notion that stock market investment is the job of only an expert. That isn’t exactly the case.
A basic understanding of the stock market and investments as a whole can help you start your trading journey. The idea is to educate yourself and stay up to date with the developments in the financial world.
Here are some investment strategies you should know before you start trading to make effective decisions:
1) Set your investment goal
The goal or objective of your investment is the foremost factor that would guide any further decision on where to invest money and for how long. Your goal can be defined based on the investment period and the purpose.
In terms of time, your investment could be driven by a short-term goal like creating a corpus for your next vacation, celebration of an upcoming occasion or a big-ticket purchase. On the other hand, a long-term goal like creating a retirement fund, a kid's education, buying a property would need a different financial plan.
Goals can also be defined on the basis of specific purposes like generating regular cash flow or accumulating wealth to meet any financial emergency in future.
2) Allocation of money
Once you are clear about your goal, you may choose the stock or the sector where you want to park your money. For instance, if you have set a long-term goal of saving for your children’s education, an ideal investment avenue could be large-cap blue-chip stocks of large and stable companies with a proven track record.
If you have set a short-term investment goal, then it is better to look at quality stocks in the mid-cap and small-cap space that can multiply your wealth at a quicker pace, albeit with a catch. These are mostly high-risk stocks and value erosion at a swift pace is also possible during the correction phase.
3) Diversification
As a famous saying goes -- never put all your eggs in one basket. Nothing can be more relevant than this statement when it comes to strategising investments in the stock market. If you like one particular sector for the growth potential it offers, invest in different companies belonging to that space instead of putting in money in just one flagship firm. Diversifying your portfolio with stocks of the companies from different sectors could better safeguard your money in case a particular industry is hit by some uncertainties.
A diversified portfolio of stocks significantly reduces risk of capital erosion.
4) Timely booking of profits and losses
Booking profits and losses is the most crucial step of wealth creation. An investor who can make buying or selling decisions based on facts, figures and goals, rather than emotions or market chatter, is most likely to emerge as a winner even at the most adverse times. Avoid getting greedy and book profits as soon as you hit the target you made when you initiated your investment. These profits can be reinvested in another stock that offers further scope of growth.
Similarly, in case of an unfavourable situation, learn to let go of your stock and book losses as soon as your risk limit is crossed. There’s no point holding onto a stock in mere hopes of a turnaround. The decision of staying invested should be based on specific facts and estimates. If you see no upcoming trigger, it is advisable to take an exit from an investment as soon as you can and reallocate your money.
5) Review
Never invest and forget. Review your financial condition, reassess your goals and recalibrate your portfolio from time to time. Your goal may have changed or your research may have helped you find a better stock. Reassessing is always advisable to keep up with the latest developments in the market and to correct any mistakes done in the past.