Investing, especially for beginners, can be a daunting task. There are numerous risks involved and many things you need to know to mitigate these risks. You must consider various factors, like the risks and rewards of various companies, sectors, asset classes, and investment strategies. You also need to learn about the various parameters used to evaluate an investment.
In today’s day and age, the markets are evolving rapidly, and it can get difficult to remember these basic concepts. In this article, beginners can find various concepts they should remember while investing.
Importance of saving money
As an investor, it is important to save and invest your money as much as possible. The more you invest, the more exposure you can get. Saving requires you to be mindful of ways to minimise expenses in your day-to-day life. You may try to maximise your savings by tracking and minimising expenses.
Financial Planning
Financial planning helps you understand what kind of portfolio you should build to meet your goals. Your financial goals may include things like saving for a new car or sending your child to college. You also need to understand your risk profile, i. e. how much risk you can tolerate and are willing to take. Recurring expenses must be accounted for in the emergency fund. It is also wise to set up health and life insurance.
Financial planning and analysing your risk profile are important. It gives you clarity on the kind of investment strategies you should go for.
Understanding investment strategies
2 of the most popular investment strategies are value investing and growth investing. But, the list doesn’t end there. After 500 years of evolution in the financial markets, various short term and long term investment strategies have emerged.
Some of the popular investment strategies are:
- Momentum investing
- Buy-and-hold investing
- Factor investing
- Core-satellite approach
- Index investing
- Systematic Investment Plans (SIPs)
As markets continue to grow at a blistering pace in the digital age, the best strategy 20 years ago may not be the most suitable for today’s markets.
You must learn about various investment strategies and shortlist the suitable ones for you.
Managing investment costs
Cost of investments includes the purchasing price and acquisition charges such as brokerage, fees and taxes. There are various ways to minimize costs. You can compare management fees among similar funds if you invest in funds. Suppose you are looking to open a Demat account. In that case, you could minimize investing costs by choosing the broker with the cheapest brokerage.
You can also compare costs among the various ways you can get exposure to the same asset class.
Buy-and-hold investing
Buy-and-hold investing is an investment strategy with a long term focus. It involves maintaining a stable portfolio over a long period while ignoring short-term fluctuations. The buy-and-hold strategy is a passive style of investing suitable for beginners who might find it difficult to understand and strategise for short-term market fluctuations.
Diversification and asset allocation
Diversification involves spreading your money across various companies, sectors, and asset classes to reduce the exposure from any one investment. Asset allocation involves allocating portions of your portfolio to various asset classes according to a certain strategy.
Asset allocation and diversification are both grounded in the same principle:
“Don’t put all your eggs in one basket.”
Power of compounding
The power of compounding is to let you earn returns on the returns you’ve already accumulated. We’ve all heard about compound interest. When interest is applied to the accumulated interest, the type of interest earned in this scenario is called compound interest. With investing, you can get compounding benefits by reinvesting your gains.
The power of compounding in stocks works when you reinvest your dividends.
Evaluating risk
Risk evaluation is important to avoid any nasty surprises down the road. You must understand the risks a company, a sector, an asset class and your whole portfolio are subjected to. Ideally, the risk in your portfolio should not go over the amount of risk you are willing and able to take. To make sure your portfolio aligns with your risk profile, you might need to rebalance whenever necessary.
Volatility
Volatility is a statistical representation of the size of swings in an asset’s price. Generally, higher volatility would mean higher risk and vice versa. Standard deviation and variation are common ways to measure volatility.
In Indian stock markets, volatility is usually gauged through the India VIX. This index shows the degree of volatility traders expect over the next 30 days in the Nifty 50 index.
Market capitalisation
Market capitalisation is the market value of a company, and it can be calculated by multiplying the number of outstanding shares by the current share price. Looking at the market capitalisation helps you understand the true value of a company and its size compared to other companies in the market. In India, market capitalisation categories are as follows:
| Market Capitalisation Category | Company’s rank by market capitalisation |
| Large-Cap | 1st to 100th |
| Mid-Cap | 101th to 250th |
| Small-Cap | 251st or lower |
Final Thoughts
Before you start investing, you must be aware of your financial health and set up insurance and emergency funds. In addition, you must learn about the various investment strategies and parameters for evaluating investments. In today’s evolving world, you must keep learning about stocks, bonds, and other asset classes.
WealthBaskets, a product by WealthDesk, allows you to invest in curated portfolios made by SEBI registered professionals. WealthBaskets are stock and ETF portfolios that follow a certain investing theme and strategy. All stocks and ETFs are transferred to the subscriber’s Demat account.
FAQs
Before investing, you should know your financial goals and your risk profile. After this, you must learn about the risks and rewards of investing in various companies, sectors, asset classes and strategies.
Before investing, the first thing you should do is set up insurance and emergency funds. These simple steps are necessary so that you don’t default on recurring expenses and your lifestyle isn’t affected in case of unfortunate events in your investing or professional life.
Before investing, you should understand how financial markets work and what the risks and returns could be from a particular company, sector, asset class, and investing strategy.
To own a stock, you must pay the purchasing price, applicable taxes, and fees to the brokers, exchanges, and depositories.
