How to invest in stocks has become one of the most trending topics in the world. The COVID-19 pandemic has significantly impacted economies around the world. However, most stock markets have been touching new highs. This is because stock markets look at the future, not past or present.
Several investors, whether young or old, have started investing in the stock market. This is due to the increase in financial literacy during the lockdowns. In addition, several people have also opted for stock markets to get better returns or create a new income source.
The stock market has proved to be a great tool to generate returns that beat inflation. But it is not necessary that stock market investment will only turn profits. You could even face losses. So if you are looking to invest in stock markets, here are 6 things you should know before investing in the stock market.
Understand the basics.
Before you go swimming, you understand how to float yourself, right? Similarly, in the stock market, it is important to understand its basics. The first thing to understand is how the stock market works. You need to understand how stocks are bought and sold in the market.
You need to understand what influences the price of stocks as well. The prices of stocks are influenced by economic conditions, future expectations, changes in currency value, etc. You must read about these things and try to figure out their impact on the stock markets.
You should also develop a basic understanding of financial metrics like P/E ratio, EPS, ROE, etc. These will help you analyse the stocks. You can also learn about different types of fundamental and technical analysis to help you pick stocks.
Define your risk and objective.
If you see the stock market as a place you want to swim in, you cannot randomly select a water body and dive into it. Similarly, before entering the stock market, you need to define your risk levels clearly. If you are willing to take higher risk, you can allocate more funds to stock market investments or trade risky shares. Conversely, if you have a low-risk capacity, you would prefer lower asset allocation to stock markets and trade in high-quality stocks only.
Investors must also define their objective of entering the stock market. Whether they want to build a corpus for the future or want to get current income. By having a clear objective, you can deploy your investments in such a way that gets you close to your financial objectives. E.g., to earn current income, investors may prefer to invest in stocks with high dividend yields.
Do not borrow to invest.
Several people often borrow from banks or others to invest in the stock market. They do so as they believe they can generate high returns. However, the stock market is volatile. At times you may profit, while sometimes you will incur losses. This makes it extremely risky to invest borrowed money.
If you incur losses on the borrowed funds, it may push you into financial trouble. Several financial experts advise investors to invest only the amount they can afford to lose. The stock market is not a place of guaranteed returns, and investors must remember that.
Expectations from the stock market.
Several investors are attracted to the stock market after hearing stories of how some people got rich overnight. While some investors may have earned significant returns in a short time, many others have lost significant amounts in the same time.
Investors should understand that the stock market is not a money-making machine. Building a decent wealth base through stock markets requires lots of patience and discipline. Investors must avoid the stock market if they are looking to get rich quick cause the investments may also disappear quickly.
Avoid the crowd and stick to your research.
Several people often buy a stock just because several other people are doing so. The issue with such a strategy is that it may backfire in the long run. The best example in recent times is Gamestop and AMC entertainment. These stocks saw heavy buying fuelled by a Reddit community. Those who exited at the right time may have earned a lot. But several others were not that lucky.
Investors must conduct their research and invest in stocks as per their research conviction. In this way, you can feel accomplished if your investment turns profitable. In the event of a loss, you can have less regret of trusting others with your investments and also use it as a learning curve.
Keep emotions at bay.
In the stock market, emotions must be kept away. Several investors tend to incur losses in the stock market due to the inability to keep away emotions for their investments. E.g., if you have invested in a stock that seems to have a bleak future or just had a negative event, the stock price will likely fall. If you keep holding it, as it may be your favourite stock, you may incur heavy losses.
In the stock market, the two common emotions are fear and greed. Both of these must be avoided in the stock market.
Investing in stock markets is no rocket science. It, however, requires investors to stick to certain disciplines and familiarise themselves with the process. Not every day in the stock market will be a sunny day, but neither will every day be a rainy day.