Stock Market Tips
“Anyone who is investing in the stock market expected the stocks to rally, but not so sure about which ones and when.” Investors always seek high market returns with minimum risks. But, one thing most investors use to ignore is, “Stock Market investments are associated with risks.” One who understand endured, the market’s ups and downs, one who doesn’t become the victims of volatility. Which is why one must consider all our options and be strategic about investing in the stock market. In doing so, you don’t need to have a high IQ or in-depth knowledge of share market.
In fact, all it takes to follow some strategic principles, fundamental tips, and do work on your investments to prevent it from losses. Or as Peter Lynch says – “Investing is fun and exciting, but dangerous if you don’t do any work.”
Therefore, we are here going to share a share market guide for all investors out there even beginner ones who are planning to invest in stock market or already invested in expecting a different outcome. This go-to guide will help you in getting stock market tips which you must follow.
But, before you go any further, you must always keep in mind that there is no magic formula for investing in stock market and get a profitable outcome. You can only improve your work on experiences, knowledge, and work on your investment by following right tips.
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5 Share Market Tips You Must Follow – An Investor’s Guide
You must have heard of other investors saying, the stock market is so volatile, it is not appropriate time to invest in stock market, and other many things but the truth is the stock market is stock market. Neither share market changed nor its benefits. On the contrary, the stock market has no rules or hidden agenda. In fact, it certainly doesn’t care about yours. This unpredictability in the stock market makes difficult for investors to get expected outcomes. In fact, the stock market volatility in the recent years has left investors in a dilemma whether to invest, hold, or sell. Even a strict discipline and patience is not enough.
So, the first thing in order to invest in the stock market while avoiding unnecessary financial risks is…
1. By Setting Your Goals
The most important question you should ask yourself is, “Why are you investing in the stock market?”Is it for getting investment returned within a time frame?
or to save for retirement? Pick your category.
Well, most investors have some goal set in their minds like –
- Buying a vehicle or real estate property
- To plan retirement
- Children education or marriage
- More wealth
The thing you must understand is the stock market is volatile and there is no certainty that your investment will be returned in the amount you expected or the time when you need it. That’s why you must make a plan and set up your goals to invest in the market. Having a goal forehand makes your vision clear and allows you to create investment strategy according to your goals. In order to do that you should give some thoughts to the capital you are planning to invest, net earnings on capital, and time of investment. It is preferable to use financial calculators to get an estimate of investment, return on investment, and capital requires. This will allow you to produce desired results and clear image of what you are expecting in the future from your investment. Moreover, having investment goals give motivation which we all need in order to keep going for a long run.
Usually, there are two types of investment goals – long-term and short-term. If you have a right objective in your mind then you will have a target to aim for otherwise, it will be like hammering a nail by using a wrench. Funding a college education for children and retirement plan are types of long-term investment goals. However, collecting more wealth and buying a new vehicle or real estate property are examples of short-term goals.
In the context of the time period, anything above more than 5 or 7 years comes under long-term goals and anything under 3 to 5 years comes under short-term goals.
Ideally, your whole investment and stock portfolio depend upon this. So, list down your investment goals before you invest in.
2. Risk Management
Speaking of risk, now that you understand the importance of research and taking independent decisions, it is time to understand the risks associated with it. Risk management is one very important thing which all investors must consider. It is because of the uncertainty linked to it and attempts to quantify the potential and take necessary action accordingly.
It is subdivided into two categories: systematic and unsystematic risk. Identifying the type of risk you are exposed to and reduce it before it weakens your investment is very important.
First, let’s talk about the systematic risk which is associated with the market and can’t diversify. The systematic risk affects the complete market and very unpredictable and undiversified. So, to avoid it or minimize it, hedging is considerably the best option you can choose to save your investment from it. To get a clear image, you can count political risk as one of the systematic risks which can affect the multiple markets like stock, bond, and forex markets.
So, your best chance is to hedge your portfolio to avoid systematic risks.
Next is, Unsystematic risk. This risk is associated with a company or sector. The risk is only implicit to a specific stock of a company. Good thing is, the unsystematic risk can be reduced through diversification.
Diversification is the most suitable way to manage unsystematic risks. It will allow you to recover from the loss of your investment.
In the stock market, if you don’t know but the return is directly proportional to the risk. If you are in maximum return, you will be taking a maximum risk in that investment. So, before you overwhelmed by the greed of profitable outcome, it would be great to check for risk tolerance.
Risk tolerance depends on the mindset of individuals. It is an important factor in investing. In simple words, we can say that risk tolerance is the degree of variability in market returns which one can tolerate. It shows, “how much large swings can one withstand in the value of investments.”
To check your risk tolerance, you can take a questionnaire which aims to help in identifying the investors’ investing styles. By analyzing and understanding the risk tolerance, you can actually make smart decisions and can avoid risky investments which keep you sleeping in the night.
Stock Market Tips: Infographics
3. Fear & Greed
It is important to understand and learn the influence of emotions on the financial markets. “Fear and Greed” is a very old saying in the stock market. Most investors have this emotional stage where they get overwhelmed by any one of these or both.
As Benjamin Graham once said, “Individuals who cannot master their emotions are ill-suited to profit from the investment process.”
No doubt, the emotions are what drives the stock market and make people make illogical decisions. When investors caught in greed, they desire for more profits and as much wealth as possible. This get-rich-quick mentality clouds their judgment and makes it very difficult to maintain the strict-investment plan.
Similarly, fear can be as dangerous as greed. When stocks suffer large losses, a market becomes more fearful which may lead investors to sell their stocks or move to low-risk securities. Fear is a very big obstacle for an investor who is in long-term investment in the stock market. It fills investors full of negativity which are driven by hope for profitable market returns in the future rather than logic and analysis of the assets.
Fear & Greed are the roots of an investor’s downfall. In physiological terms, the greed is no different than power. Both spread corruption. When a person decides to get something he/she want then he/she started pursuing this and in doing so, the happiness of others fewer matters. This single-mindlessness leads to only more greediness and even step beyond that. And once people become the part of the corruption they start fearing of being caught. And like that, a never changing cycle began from this very moment.
Which is why it would be wise to check the entry and exit prices before investing. And don’t get too greedy in favorable conditions.
4. Research Is Essential
In India, most investors’ decision is influenced by the actions of their family members, acquaintances, and friends. It is a good habit of yours asking for an opinion and entrusting your money on the suggestion of other. But, you gotta understand that the money you invested is your hard-earned money associated with stock market risks. If anything happens, it is your money will be on the line.
Which is why, instead of depending on the second opinions, you should do the stock research from your end for the sake of your future investment. Research is essential and taking time to do research and study the financial history of a company that you are thinking of investing in. You cannot predict that a stock will go up or down but you can minimize the possibility by doing deep research and evaluate the past performance of a company’s growth. Usually, there are two common types of research: Technical & Fundamental. A good investor understands the importance of doing extensive research in order to decide where and how to invest to get better market returns.
Technical research mostly was done by the stock market traders who are in short-term investments and monitor the past values of stock and on that analysis, predict the direction of the market. This analysis is the result of deep research on the past and current value of a stock. Once a trend has been confirmed, it helps traders to predict the future values of stock.
On the other side, the fundamental analysis is widely used by investors who are in long-term investments. In fundamental research, an investor analyzes the various aspects of the company he/she invested in and give less importance to the value of the stock. It is because, for a long-term investor, the value of the stock is not significant. Instead, what matters is the effect of the economy on company’s health.
Many investors' investments are based on company’s name and reputation. But, investors should be wary of companies with their revenue, debt, management, and cash flow. But, if you are a beginner with no in-depth knowledge of share market then you can do this by taking professional help from stock market experts who are professional analysts and researchers of the stock market who provide proper guidance and unbiased stock advice.
Knowledge is essential and as Warren Buffett said, “Risk comes from not knowing what you are doing.”
5. Avoid Leverage
Leverage is a market strategy of using borrowed money to increase the potential market return on an investment. Or you can say, “It is an amount of debt used to finance an investment.” Beginner investors should avoid leverage at any cost. Leverage is something which can help you to execute the stock market strategy you want. But, you can’t deny the fact that it also works as an anchor in case of stocks fell. Future contracts and options are the methods by which investor add leverage to its portfolio.
To better understand this, let’s assume you have $1000 to invest. This amount is worth to control 10 shares of some XYZ stock, but to increase leverage you could invest the $1000 in 5 options contracts. You would then easily control 500 shares instead of just 10. It may seem good to add value to our investment by borrowing money but it comes at a great price. Just think about it, if you use leverage to make an investment but if the investment moves against you, then you will be facing much greater loss than it would’ve been if the investor avoided the leverage.
By avoiding the leverage, you are actually minimizing the investment risks at some level.
However, the professional traders think differently and believe that trading in non leveraged markets is amateur trading. Nevertheless, it is all up to you. Because it is you who are investing in the stock market. So, any loss or gain will be yours.
Basic Knowledge Is Important
Like we discussed above, in doing better in the stock market, you need to do in-depth research and analysis in stocks you invested in. Even not just that to become a smart and informed investor, you need to understand the market and the risks associated with market and company’s stock. And by doing research, we meant to understand the market of stocks, the direction of the market, and movement in the prices of stock.
In order to do that you need to familiar with at least few basic terms and concepts before you make your first purchase.
Financial Metrics like P/E ratio, Return on Equity (ROE), Earning Per Share (EPS), and Compound Annual Growth Rate (CAGR). Basic understanding of calculation and comparing different companies with these metrics is very important.
How to perform technical and fundamental analysis and how they can be used for making a different stock market strategy.
A general knowledge of orders type use in stock market such as limit order, stop loss, and other different types of order.
Final Thoughts: -
Overall, we can say that there are few things which we all must keep in mind while trading and investing in stock markets. The share market is so volatile that sometimes it creates doubts in the mind of investors, but if you follow the above tips completely then you will be moving in the same direction.
Just don’t forget, there is no magic formula for gaining in stock markets every time. The only magic formula which works is the combination of setting goals, making smart decisions, managing portfolio risks and get proper guidance from professionals which you can use to invest in the stock market to build strong assets. The stock market is a common trading place where you can easily sell stocks at any time and get back to your investment with profit. The liquid nature of stocks which makes it most attractive place for investors and digital participants to invest in stock market.
Nevertheless, if you have anything to ask or would like to add something then don’t forget to mention in the comment section below.