It can be difficult to know what to do in share markets. Investments in share markets come with their challenges. There are various pitfalls you must dodge and habits you must make. Here are some of the do’s and don’ts of investing in stock markets.
Do’s of Investing in Stock Market
Start investing early
The best time to invest in the share market is when an investor is young and can afford to take risks. Young investors can take more risks and recover from wrong decisions without affecting their long-term financial goals. When you start investing in stocks early, you can get better compounding benefits from reinvesting dividends.
One can even start investing in small amounts. You can start investing in the stock market for as little as ₹500.
Invest Only With Your Surplus Funds
Before investing, you should always consider the necessary expenses like rent, living expenses, insurance premiums, EMIs, etc. The leftover from these expenses is called surplus funds. Investment of surplus funds is safer as you won’t miss out on important expenses.
People often say, ‘invest only what you can afford to lose.’ Stock market investments are subject to market and business risks. There’s no need to let these risks affect your lifestyle.
Know Your Risk Profile
Knowing your risk profile before investing and creating your stock portfolio is important. It is easier to find the right mix of high-risk-high-return assets and low-risk-low-return assets when you understand your risk profile. A risk profile is measured according to your risk tolerance, risk capacity and risk requirements.
Risk tolerance is how much risk you are willing to take. Risk capacity is how much risk you can take based on your financial situation. Risk requirement is the amount of risk you need to take to reach your financial goals.
If you already have built a portfolio, you should check if your investments match your risk profile.
Get educated about the stock market
It is a good idea to invest in stock market education. You can start by learning the basics of fundamental analysis and technical analysis. Learning about how a company does business will help you understand how factors like changes in government regulations, the strength of competitors, etc., will impact the stock.
The stock markets have been evolving at a rapid pace since the turn of the century. You must make an effort to understand how changes in technology and regulations can affect investments.
Various courses conducted by BSE (Bombay Stock Exchange) may help you understand stocks better.
Diversify Your Portfolio
Diversification in investing refers to holding various assets to reduce the risk exposure from any single asset. Every stock has a different risk to return ratio. By holding a combination of stocks, you can build a portfolio with the expected risks and returns that suit you. Various investment portfolio diversification strategies exist for various investment needs and risk profiles.
Diversifying your investment portfolio allows you to get exposure to various industries.
Don’ts of Investing in The Stock Market
Don’t keep unrealistic expectations about investing
It is harmful to keep unrealistic expectations about stock investments. Suppose you expect high returns even before doing research. In that case, you might limit yourself to investments with high expected returns, and hence high risks.
Ideally, you should learn about the market conditions, select sectors to invest in, and find the expected returns on investments on stocks in those sectors. After all this, you should create the stocks portfolio that suits you.
Expectations play an important role in investing.
Don’t Invest Based on Psychological Biases
Psychological biases like loss aversion, overconfidence bias, anchoring bias, and herd behaviour bias can get in the way of creating a suitable stock portfolio. All investors have to work through their own biases in investing. Sometimes investors may react too much to short term losses or be too confident in stocks that are losing money.
These are examples of psychological biases in financial investment. Behavioural biases can be dealt with by sticking to a sound investment strategy.
Don’t Follow the Herd
Blindly investing in a stock just because other people are investing in it is a bad idea. Some people may have a herd instinct to be pulled towards stocks they hear other people are buying. People follow the herd because they feel safer, or fear missing out on opportunities. But, you should practice restraint and invest only based on the research you can trust.
Herd mentality can sometimes lead to bubbles like the Dot-Com bubble of 1999-2000 or the real estate bubble of 2008.
People should keep their gambling instincts aside when making investment decisions. Instead, investment decisions should be made purely based on credible information. Instead of taking unnecessary risks, you should try to develop sound strategies.
Activities like taking free tips, betting huge sums on short-term movements, or using your emergency funds for short-term trades are akin to gambling on the stock market.
Don’t Trust Free Tips
Price manipulators often spread misinformation to fraud unsuspecting investors. They may try to lure investors through ‘free investment tips’. Investors should always try to verify the source of their information. In addition, not paying attention to investment advice posted on unregulated Discord servers, Reddit channels, or any messaging boards would be wise. Limiting the information you consume is a good way to sidestep misinformation.
Free investment tips in the share market are not always easy to identify. Sometimes, these tips may be given by social media influencers, or they may be presented subtly so that investors do not get spooked.
Various opportunities and threats will present when you start investing in stock markets. You should practice habits like trusting information only from credible sources. In addition, it is helpful to pay attention to your mental and emotional wellbeing and build an investing mindset free of psychological biases.
We have listed various do’s and don’ts in this article. Still, investors should always keep learning, and update themselves about what’s happening in the stock market.
At WealthDesk, you can find managed portfolios for various themes and investment strategies. These managed portfolios, called WealthBaskets, are curated by SEBI registered professionals. With WealthBaskets, it is possible to invest in professionally managed portfolios with small amounts of money, like ₹5,000.
The 10% rule states that you should sell off a stock if its value falls 10% or more from what you bought it for. The idea is to avoid hesitancy in cutting losses.
Generally, you can sell your stocks when the market is open. However, sometimes you may find it difficult to sell stocks if the trading volumes are low. So, it is important to be careful about investing in low trading volume stocks.
Equity market investments attract transaction taxes and taxes on capital gains. Transaction taxes are deducted when you make the trade. Capital gains have to be reported and are taxed based on the period for which they were held.
There are several golden rules for investing including knowing the business, investing only with your surplus funds and diversification. You can learn about the golden rules for investing in stocks here.