Many Indians are learning the benefits of investing in the stock market and are eager to invest their money in shares. They aspire to see their investments double in a few years. However, it is only possible to make a decent return on your stock market investment if you invest prudently after doing your due diligence. Sadly, many investors fail to generate decent returns since they refuse to do the hard work before investing. Instead, they look for shortcuts and ideas without understanding the thesis and reasons behind the investment.
For a new investor, in-depth research and stock analysis may not be feasible. That is mainly due to time constraints and a lack of knowledge in finance and accounting. So, here are a few ideas and guidelines you can follow before investing in the stock market.
Guidelines and Ideas to Invest in the Stock Market
1. Do not skip the basics of investing
Do not rush to open a demat account and investments in the stock market as soon as you realize you can double your money in the markets. First, learn how and why you can double your money by investing in stocks. Understand the concept of compounding, but at the same time, learn about the risks involved with investing in the stock market. To learn everything mentioned previously, consider reading blogs and books on investing. Doing that will help you have realistic expectations and set realistic goals. Using the best finance app will not make you a successful investor, but having fundamental knowledge regarding the stock market will.
2. Research, but only invest when you understand the business
“Never invest in a business you cannot understand” is one of the most famous sayings of the ace investor Warren Buffet. His quote holds accurate as, after all, when you invest in a stock, you are investing in a business. However, as a new investor, you may say that you do not understand most businesses. In that case, to attempt to at least understand the core structure and operations of the business. Reading annual reports, listening to management interviews, and going through the company con-calls would be the best way to understand the business. However, not every investor may have time for that.
Instead, you could speak to people working in those industries and read broker research reports. You can start by researching sectors that you find easy to understand. Then apply principles of basic fundamental analysis, evaluate the company’s sales, margins, and earnings, and compare them to its peers. You can do that if you have a basic understanding of profit and loss statements. The businesses are usually those where the company sales and earnings show growth, and the margin remains stable over a long period.
3. Stay away from the herd mentality
Now it is true that you should invest in great business. However, sometimes the market looks at some stocks with euphoria. In that case, investors come on board and drive the stock price to such an extent that it becomes overvalued. In such a case, it is better not to join the bandwagon and instead find investment opportunities elsewhere. No matter how great a business may be, investing in that stock has a higher downside when the valuations skyrocket. When the valuations are high, investors expect the business to perform exceptionally well. Perception changes if the company’s performance is off even by a slight margin, and the share price may plummet.
At the same time, companies don’t need to ascertain high valuations only when the market expects the business to do well. In some cases, stock prices are manipulated and raised by operators. Many retail investors jump on board, and then the price of such stocks crash, trapping ordinary investors.
4. Manage risks efficiently
One of the best ways to manage risks is to have a diversified investment portfolio. Do not put all your money into one particular company or industry. Instead, select a handful of companies and see that your investments are spread across at least three sectors. At the same time, identify the risks, and track your companies closely. Use the best finance app to follow the news around investments. If you see any fundamental risks, consider selling those stocks, whether you are sitting on a profit or loss. However, do not mistake mere market volatility for fundamental risks. At the same time, also consider selling some of your stocks if they have given you solid gains.
The best inventors in the world spent several hours researching and understanding the business before investing. You do not have to put in that level of rigorous research, but at least do the bare minimum. Brokers like Kotak Securities provide stock ideas to their clients. However, do not invest after looking at the estimated target price. Instead, read the entire report to know why it is a good stock market investment or idea.