5 Things to keep in mind, while trading / investing in the Stock Markets
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Do you see constant news flashes about the stock market? Have you always been intrigued by the big bull Rakesh Jhunjhunwala? Ask Warren Buffet, the greatest investor of all time, what is his advice to investors and he says “Don’t lose money!” Let’s break it down and make it easier for you, to keep the following things in mind before investing.
1. Investment goals
Just like we all make personal goals and health goals, let us first clearly identify what are our investment goals. Without a proper plan, things tend to go topsy turvy. You need to first plan how to spend your money. Each person’s investment goals are different. Financial goals can be long term or short term. What are you investing in the stock market for? For saving, buying a house, personal use, education, emergency expenses, or retirement?
Short term goals can be buying a car, or going on a luxury vacation. This period is around 3 to 5 years. Goals should be SMART- specific, measurable, achievable, relevant, and timely. This will not only change your outlook towards the importance and relevance of your goals, but also your action plan to get there and reach your targets.
Financial goals help you determine how long you need to stay invested in the stock market and how much you need to invest. It also helps you understand your investing strategy, which is crucial to make your money grow. Companies and stocks you choose to invest in are a by-product of clear financial goals
2. Risk appetite
High risk, high reward. We’ve all heard of this saying. When you invest in the stock market, your initial principal amount is exposed to several risks like market risk, liquidity risk, concentration risk and inflation risk. These risks indicate the possibility of losing a part of your invested capital due to various reasons.
However, you can’t have an over optimistic approach. You must keep the risks in mind while investing in the stock market. Ask yourself, how much money do you want to make and how much money are you willing to lose to make it?
Classification of investments based on the level of risk:
High Risk – Equities and cryptocurrencies
Moderate risk – Mix of debt and equity
Low-risk – Fixed deposits, saving schemes along with few debt securities.
Some factors to consider when determining risk appetite include the investor’s age, financial goals, investment horizon, current and expected future income, and net worth and insurance cover.
According to your risk appetite, you can be a conservative investor, moderate investor or an aggressive investor. You can assess your risk appetite by first understanding your financial goals, time of investment, and reaction to market movements such as volatility.
3. Diversity of stocks
Don’t put all your eggs in one basket. Similarly, don’t park all your money in one place. Diversification is a process of investing in securities that have zero or low correlation with your portfolio. It is a management strategy that blends different investments in a single portfolio. The idea behind diversification is that a mix of investments will yield a higher return.
This diversity includes commodities, gold, Exchange Trade Refunds (ETR), Real Estate Investment Trust (REITs), Bonds (government bonds, fixed income debt instruments),Real estate (land, buildings) and mutual funds.
When you purchase stocks, ensure that you buy stocks of large, medium, and small companies. It is also essential to purchase stocks of different sectors, for example finance, healthcare, communication etc.
A diversified portfolio is important, as it helps your overall investments to be stable incase of of any financial disruption.
4. Never borrow money
Probably one of the worst mistakes you can make. Don’t borrow money to invest in the stock market. Warren Buffet says, “Do not borrow money to invest in equity and do not put any money in equity which you require in the near term.”
If you borrow money to invest, and you make a profit, you can return the money. However, if the value of the shares falls, not only do you lose that money, you become further in debt. So definitely start small, and build your portfolio gradually.
5. Being realistic and keeping your emotions aside
Don’t try to predict the stock market. You have to be patient, and can’t expect a profit. Algorithms. Best explained by the following quote. “It’s in the nature of stock markets to go way down from time to time. There’s no system to avoid bad markets. You can’t do it unless you try to time the market, which is a seriously dumb thing to do. Conservative investing with steady savings without expecting miracles is the way to go,” Charlie Munger.
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