Stock markets: 9 tips for new investors

Stock markets are considered as one of the most profitable ways of investing one’s money. Compared to fixed deposits (FDs) or provident funds (PFs), which have fixed rates of interest, stock or equity markets have a higher rate of return on your investments.  Besides, investors become ‘part-owners’ of the companies they invest in.

Of course, it does come with its own share of drawbacks. The element of risk runs high in equities. Whereas, investment made in bank deposits or government securities is considered almost ‘risk-free’. However, this risk can be managed with a thorough analysis and understanding of how the stock markets operate. Also, a stock market investor must be ready to withstand the risks and not get bogged by constant fluctuations and temporary losses.

To make it easier for you to invest in the stock markets, here are 9 essential mantras and basic tips that may help you make sound investments:

1)  Avoid herd mentality: A through research is essential before investing in shares. It helps minimize risks. Try not to invest in a stock just because others are investing in it too. The strategy will backfire later. Invest because you believe in the stock or your strategy. For this, you need to study the company’s financial performance; its past records; and understand its expected future performance. A layman investor can study the balance sheet and other financial statements, and analyze quarterly results to decide whether the company’s stock in worth putting your money into.  Don’t follow other people’s investment decisions blindly.

2)  Don’t time the market: The stock market is unpredictable. It is not possible to predict when it will rise or fall and by how much. This is called timing the market. It is better to avoid doing so. You may get it right once, but not every time. Analyze the performance of companies and your shares, but don’t try to predict what the stock market is going to do.

3) Don’t be afraid of market volatility: It is a known fact that stock market investment includes taking risks. This is because stock prices are subject to volatility and fluctuations. Not everyone can stand this volatility. Many investors often jump the gun and sell-off shares in a panic to trim their losses. This is not good. It is important to not panic, understand the underlying reasons behind the volatility keeping the long picture in mind, and then arrive at a proper decision. This is because bull markets – even the biggest ones – see days when the market falls. They are also prone to volatility and periodic instability.  In such a case, a disciplined approach to investments is important. People who invest their money systematically in the right shares after proper analysis and patiently hold onto their stocks are likely to profit.

4) Be realistic: There is no problem in desiring to have the maximum returns from your investments, but it is necessary to have realistic financial goals and not get swayed by emotions or greed. You should be aware of your best-suited investment options and the returns you are likely to make. Studying the risk-return factor will help in creating a diversified portfolio. Normally, higher the return, greater are the risks involved. Having unrealistic expectations or wishful dreams of your investments multiplying manifold overnight will only lead to disappointments.

5) Do not over-invest: Make an investment budget for yourself that leaves money for your daily expenses and emergencies. This acts as a safety net. Do not invest in the equity market or even another other asset beyond your means to make a quick buck. You may end up burning your fingers. It could only take one bad news about a company for its stock price to nose-dive, putting your hard-earned money at risk. Hence, it is advisable to invest only if you have surplus funds.

6) Don’t just look at the stock price: The current share price may not always be a fair reflection of the company’s financial performance. Sometimes, it may be less or too much in comparison. So, the investor needs to find out if the company shares are undervalued, overvalued or fair. Avoid over-valued shares, for they are bound to fall. Prefer under-valued shares are it is quite likely to rise in the long-term.

7) Diversify investments: Your risk factor can be reduced by diversifying in the correct way. Buy shares of companies belonging to various industry sectors. Also buy different types of instruments like shares, FDs, and mutual funds. Don’t put all your money in a single industry, stock or financial instrument.

8)  Set an exit price: There are many investors who only buy and rarely sell. Always set an exit price – one on the higher side and another on the lower. The first is called the ‘target’ price; the latter is called ‘stop loss’. The stop loss helps you to limit your losses, even if you are a long-term investor. Selling at the target price allows you to use the money to invest in a new bunch of high-potential stocks. This helps minimize losses and maximize profits.