Running in a bull market driven by investor sentiment has helped many people achieve easy returns. What many people fail to realize is that entering a business is easy, although it may not always be financially viable to maintain it. In most cases, there is an intention, but a lack of much-needed financial education that reduces the chances of profiting from the momentum of the stock market. In most cases, stock investors rely on speculation rather than careful research based on rigorous valuations and careful analysis. The stock market works by a set of rules, although they are ignored by most people, especially new investors.
What to do when investing in the stock market
Enjoying the earnings of the stock market is not enough. Learn to analyze the fundamentals of companies listed on the market. Undo any tendency to rely on unreasonable guesswork before buying or selling shares. To speculate about the next possible stock market movement by investing your earnings in it will only doom. You may get lucky once or twice, but not always. The first step is to start learning the market. Enroll in a degree course or program to learn the fundamentals of stocks, including cash flow, return on assets, profitability, quality of capital management, and more, to assess the soundness of the companies you’re investing in.
Experience matters, so it is okay if you are not earning from your first day or week in the market. It would be better if you enlist the services of experienced brokerage firms who get the right information about the right sectors and stocks, along with advice on options, exchange-traded funds, sovereign bonds, etc.
Don’t put all your earnings and savings in one go. Start by investing small amounts in the stock market. Beginners should start by investing the least amount possible and then gradually increase the investment as they gain more knowledge and confidence. You should not underestimate the importance of investing early in life. You get the benefit of staying invested for a long time as you earn both dividends and income from capital growth. Moreover, you get more time to recover from your losses during the initial years of your investment journey. Many investors complain, “I’ve invested in this stock based on suggestions, but know nothing about the company’s business.” The market falters, stock prices go down a bit and investors tremble. This is due to a lack of proper planning and improper research about the fundamentals of the companies they invested in. Before deciding whether the company’s shares are worth your money and time, check the company’s business details, financial statements, ratios, management, etc. The stock market belongs to everyone, yet it does not favor anyone in particular. The risks involved in stock investing are numerous and there is no substitute for guaranteed returns. The prolonged bearish nature of the market makes many investors restless and pessimistic, thus, explaining to them the need to invest the money contained in surplus rather than diluting their savings in the market. It is rarely possible to buy a stock at its lowest price and sell it at its highest selling point. Market timing is not possible, which means you cannot be sure at what price the stock you are paying for today will be available the next day or during your next buying session. It explains why you should not buy or sell at once. Taking advantage of this by buying or selling a stock in lots will open you up to a lower buy and a higher sell price, while getting more money to invest. Have an investment goal and plan in mind before venturing into the market. Decide on your shares based on whether you want to accumulate a large corpus or build a retirement corpus within the next 10 years. Some stocks are evergreen, so you can buy them in smaller lots during dips to create a valuable heirloom. Moreover, with regular dividends and sporadic returns on stocks, the motivation is high, thus, setting the much needed momentum for the growth of your investments. Setting a financial goal will encourage you to review your plan and work out a solid and long-term capital strategy accordingly. Diversifying across sectors and stocks will reduce the risk inherent in stock market volatility. Losses in one or two stocks are largely offset by gains in other stocks. Out of a carefully selected portfolio of 10 stocks, there is a possibility that two of them may decline due to unforeseen market conditions. However, it will not affect the portfolio much if it is properly diversified across sectors, stocks and themes.
The focus should be on capital conservation rather than capital appreciation. More than careful planning, you must exercise discipline while investing in stocks.
Do’s and don’ts of investing in the stock market
There are a lot of expectations from the stock market. More and more investors have a belief that higher investments lead to higher returns. This explains why many people make the mistake of investing a large amount in a single trade or spending too much on buying a particular stock. The rule of thumb says, “Never invest more than one percent of the total capital in a single business.” Many people dream of making huge profits from the stock market without realizing how trading and investing requires discipline and being mindful of volatility. Not realizing the possible future consequences or volatility in the stock market, many investors try to average the investments made. This causes them to hold their stock for an extended period of time. The inability to book profits whenever possible has caused many investors to lose capital and book unwanted losses. A financial goal needs to be kept in mind so that you can make proper calculations to protect yourself from maximum losses.
Even though it may seem irrational, handling stock market volatility is a skill that can be acquired through learning, experience and persistence. You should treat the stock market like any other business instead of betting your money. Expectations should be realistic, so you should have proper strategy such as deciding what to buy and when. Attachment to a particular stock shouldn’t translate into undue loyalty, which means you should be prepared to get rid of the stock when the need arises.