Stock markets can be a tricky business, if not managed wisely and skillfully. Here’s a list of 10 important points to consider before you invest in a stock market. Stick to these golden rules and ensure that your hard earned money is growing, at the right place.
1) Analyze your financial position
Analyze your honest financial position, the amount you’re willing to invest and your risk tolerance level. Figure out your goals and requirements with due diligence. Have a proper plan about how you are going to channel your savings. You many not always get expected returns. Evaluate your comfort zone in taking such risks. The reward for taking on risk is the potential for a greater investment return.
2) Research well about where you’re investing your hard earned money in
Warren Buffett says, “Never invest in a business you cannot understand.” If you’re absolutely brand-new to investing, get the lay of the land first. Read some basic books, do some research, get advice from trusted friends, family or get a financial expert to simplify the matter to you. Understand how the whole system works and learn what bonds, stocks, mutual funds and dividends are in detail. Do not blindly follow speculations, news reports and opinions.
3) Have realistic expectations
Yes, one should always be hoping for the ‘best’ from your investments, but you could be heading for trouble if your expectations are based on unrealistic assumptions. Your friends or acquaintances making huge money out of stock markets doesn’t necessarily mean you may too. Do not expect too much. Do not settle for too less. A quote goes: “The stock market is designed to transfer money from the active to the patient”.
4) Choosing Intermediaries
Always prefer market intermediaries which are registered with SEBI (Securities and Exchange Board of India)/Stock Exchanges(The Securities and Exchange Board of India is the regulator for the securities market in India) Execute the offer documents and risk disclosure documents only after understanding its terms and conditions. Beware of professionals who lure potential investors and make their “opportunity” sound more legitimately high yielding. Have clear communication with your agent, broker or intermediary and ask questions.
5) Monitor your investments regularly
We are living in a global village. Any important event happening in any part of the world has an impact on our financial markets. Your share in the stock market could go up or down within a matter of minutes. Hence one should constantly and rigorously monitor our portfolio and bring to effect the necessary changes or appoint a good financial planner who can do it for you.
6) Emotional Pressure
Investing in a stock market could bring a lot of tension. You should establish the point at which you will liquidate your holdings. You should not be hung between whether to sell a share when it’s value decreases or hold onto it for potential future value rises .In other words, have an exit strategy before you buy the security and execute that strategy unemotionally.
7) Consider an appropriate and optimum mix of investments
To protect against significant losses, choose a number of investments that best suits your position. Do not put all your eggs in one basket; Market conditions that cause one asset category to do well often cause another asset category to go down and have average or poor returns. By investing in more than one asset category, you can make sure that even if one of them doesn’t work out like you wanted it to, you’re backed up. Hence, you can reduce the risk that you’ll lose money and your portfolio’s overall investment returns will have a smoother ride.
8) Create a broad portfolio
An investment portfolio can be thought of as a pie that is divided into pieces of varying sizes, representing a variety of asset classes and/or types of investments to accomplish an appropriate risk-return portfolio allocation. Diversification of portfolio across asset classes and various instruments is the key factor to earn maximum returns on investments with the minimum risk involved. Diversifying can help you smooth out the returns while still achieving growth. Rebalance your portfolio occasionally.
9) Understand the Company
“It’s far better to buy a wonderful company at a fair price, than a fair company at a wonderful price.” It is important to analyze factors such as the company’s earning history.net income, per share earnings, the company’s debts, liquidity levels, Return On Assets (ROA) ; how efficiently the company is generating earnings. Net margin levels etc.
10) Keep a look out for Volume and Dividends
Volume, in terms of stock market is commonly reported as the number of shares that changed hands during a given day. An average stock volume of over 50,000 is good to go. The low level of volume indicates a low level of liquidity which means that the demand for the particular stock is not much.
Dividend is defined as a payment made by a corporation to its shareholders which maybe cash dividends or stock dividends, whereby additional stock shares are distributed to shareholders. When investing in a company, check to see if they are currently paying a dividend. If a company has ready money to hand out, then they are usually in a good position. Also, the companies that pay the highest dividends often have steady and consistent growth.