In today’s world, stock investing has become significantly accessible. You can start investing in stocks with as little as ₹500. With a Demat account, anyone can invest in stocks at their convenience. Retail investors are involved in various forms of investing like day trading or investing with a long-term horizon.
As investing becomes more accessible, one must not forget some of its golden rules, which are:
Know What You are Investing In
When you invest in a stock, you own a part of a company. Therefore, you must make an effort to learn about the company’s fundamentals and its business model. Knowing the business is the most basic rule for investing in the stock market. Also, learning about price patterns through technical analysis before investing could also be a good idea.
Invest Only With Your Surplus Funds
There is always some risk involved in investing. You should not invest money you would need for an emergency or some foreseeable expense. Before investing, it is essential to account for living expenses, rent, loan payments, and insurance premiums. The surplus that you are left with can be invested in stocks.
Investment of surplus funds is comparatively safer as you won’t risk not having money for necessary expenses.
Set Realistic Expectations
Investing in stocks does have the potential to give enormous returns. But an investor must not invest solely to get those enormous returns. Instead, one must set their goals according to what their research shows is possible, and what their individual risk profiles can handle.
Diversify Your Portfolio
Diversification spreads your money across various assets to lower your exposure from any single asset. It is important to diversify your investments to lower your risk.
“Don’t put all your eggs in one basket.”
It is easy to see why you should diversify investments. Every stock carries a certain risk. If you hold only one stock, your portfolio will sink or sail depending on that one stock. But, if you have diversified investments, you can lower your risk from a particular stock.
Don’t Get Emotional
When a particular stock gives you good profits over a long time, it is easy to get emotionally invested. Likewise, when the price of a stock falls, investors may panic and sell-off. But, emotions and investment decisions should be kept separate. Buying and selling of stocks must be done only based on research and analysis that you are confident about.
Be Disciplined About Investing
Discipline in investing means making rational decisions and investing regularly. As we mentioned earlier, you must avoid making emotional decisions. At the same, you should be regular in your investment activities. Investment discipline can protect you from various follies like snap decisions, panic sells, blind buys, etc.
Successful investing takes time, discipline and patience.
Don’t Try to Time the Market
At any point in time, there are various factors affecting stock prices. So it becomes difficult for most investors to predict how the prices will move. In theory, you may be able to earn huge profits by buying low and selling high regularly. But, it is very difficult to consistently tell when a stock price will rise. So, you should focus on finding businesses that are expected to grow instead of aiming to make profits from short term price movements.
Avoid Herd Mentality
Don’t buy just because other people are buying. Don’t sell just because other people are selling. Of course, you must re-evaluate your position when you see reports of buying or selling pressure for a stock you own. But, do not base your decision to buy or sell simply based on buying or selling pressures or, worse, rumours.
Herd mentality is the worst investment mentality.
Hedge Your Positions
Investing in stocks carries a certain risk. Hedging is offsetting these risks by taking opposite positions. Hedging your position can be thought of as a form of insurance. You can hedge long positions (own a stock and expect it to grow) through futures and options. Similarly, you can hedge short positions (positions in which you expect to gain from a fall in stock prices) by buying call options.
Stop-loss orders are designed to limit an investor’s losses on a security position. You can place an order with your broker to buy or sell a stock once the stock reaches a certain price. The use of stop-loss in trading can prevent large and uncontrollable losses.
Avoid Investing Based on Rumours
Investing based on hearsay or rumours is the worst type of investing you can do. You must focus on investing based on the research you are confident with. Avoid making financial decisions based on unsolicited emails and message board postings (Reddit, Quora, Facebook, Instagram, etc.).
There is a possibility that manipulators may be spreading false news to lure unsuspecting, gullible investors. Only consume news from sources you can trust.
Although investing in stocks is more accessible than ever, one must not downplay the risks that come along with it. There are possibilities of incurring losses due to panic sells, blind buys, trading based on rumours, setting unrealistic expectations, or simply not knowing the business you are investing in.
We hope the rules mentioned above help you invest in stocks safely.
At WealthDesk, you can find various portfolios of stocks and/or ETFs (exchange-traded funds). These portfolios, called WealthBaskets, are made by SEBI-registered professionals. There are WealthBaskets for various themes, investment strategies and ideas. You can even choose to invest through SIPs if lumpsum investing does not suit you.
The rule of 10 says that when a stock you hold falls by more than 10%, sell it. Here the investor will not try to fully understand the reasons for the loss or wait for the stock to make a comeback. The idea behind this rule is to avoid hesitancy in cutting losses.
Investors can limit their losses by placing a stop-loss order with their broker. A stop-loss order can be placed to buy or sell a security once its price hits a certain level. A stop-loss order is designed to prevent large and uncontrolled losses.
Conventional wisdom says that an investor should sell a stock after making a 20-25% profit. The idea behind this rule is to avoid over-holding a particular stock and to ensure a certain level of profits from investing.
Presently India does not allow foreign investors to invest directly in stocks. However, high-net-worth individuals with a net worth of at least $50 million can invest in Indian stocks indirectly through a Foreign Institutional Investor (FII).