By Rimple Verma
It is no secret that investing in the stock market offers one of the best potential returns over the long-term. However, stock investing is not simple. It requires a strategic approach and an investment plan that is based on strong fundamentals. There are many factors that one needs to keep in mind before investing money in the stock market. So here are some best ways to invest in the stock market.
1 Define your investment goals
You can’t reach anywhere without a clear and defined goal. Investing is no different. Any successful investor has investment goals that are well-defined and based on the individual’s financial situation and aspirations. Investing with a broad perspective of earning returns is not enough. You need to know the kind of returns you need to fulfill your goals. This will also give you an idea about the ideal time horizon for your equity investments. So before you ask the question on how to invest in shares, ask yourself about the goal you want to achieve finally.
2. Determine your risk tolerance
Every individual has financial responsibilities that determine his/her tolerance for investment risks. While some people might be comfortable with investing in stocks that can yield double-digit returns but drop to zero if the markets turn unfavorable, others wouldn’t mind an 8-9% return with lesser risks. Stock markets are risky. But, all stocks don’t carry the same risks. Determining your risk tolerance can help you choose the right stocks.
3. Research the company thoroughly before investing. To explain this point, we would like to talk about how to invest money in stocks via two popular ways :-
- Trading
- Investing
Trading is about benefiting from the volatility of the market. A stock trader looks for opportunities to buy stocks at a lower price and sell them for a marginal rise in price. An investor, on the other hand, looks at stocks as an opportunity to be a part of the growth story of the company and has a long-term view.
For instance,looking at the fluctuations in Vodafone-idea share price, a trader might want to take the opportunity to make money based on share price volatility. However, an investor will choose the said company only if he has thoroughly studied the telecom sector and assessed its growth prospects.
Trading is very short sighted and hence risky, the better approach is to keep a long term perspective and invest instead.
To start investing, the first step is to research the company thoroughly. Go through the financial statements and all other details of the company and assess its fundamental strength. A company with a strong foundation can weather most economic storms (like the current pandemic) and emerge a winner. Investing in such companies ensures that your money fetches you good returns in the long-run. So instead of searching on the internet for the best day trading stocks that you can invest in as a beginner, do your own study about a company’s fundamentals and arrive at your own conclusion.
4. Remain Patient
While we are not ruling our medium-term stock investment options, data suggests that investors who hold on to good-quality stocks for 7-10 years tend to make the maximum return on their investments. Hence, when you look at stock investments, keep a medium to long-term investment horizon in mind. So for instance, you invested in a company like Vedanta, because you were aligned with it’s business objective and analysed the company’s strengths and weaknesses. However, you panicked when for some reason Vedanta share price fell down and sold your holdings. This may not be the best strategy as stock markets recover eventually and you might have lost a wonderful opportunity to create wealth in the long run.
You can redeem your investments at any time if you think that you have made good returns but, don’t ignore the potential benefits of long-term stock investments.
5. Avoid emotion-based decisions
When the market crashed in March this year due to the pandemic and the lockdown, many investors panicked and sold their stocks at a loss. They were worried that if they waited longer, they might not be able to recover their investment amount too. The fear and panic led to a decision which many investors regretted later as markets started recovering their losses in March during the next two months.
It is important to remember that markets are unpredictable. Also, there are several macroeconomic and political factors that impact the investor sentiment that reacting to a bad phase and making a buy/sale decision can be counterproductive. Hence, it is important to consider facts before you make any decision.
6.Diversify your investments
Diversification is the key to successful investment as it reduces the risk without compromising a lot on the potential returns. Apart from diversifying across different assets like equity, debt, commodities, gold, etc., it is also important to diversify within each asset class. Talking about equity investments, ensure that you diversify across different market capitalizations, sectors, geographies, etc. to minimize the risk of concentration.
7. Always have a trustworthy investment advisor around
The stock market is a huge place. Everything that happens in the world affects the market in some way or another. While you might be good at analyzing and understanding things, if investing is not your full-time profession, then you will need assistance making critical decisions. This is where an investment advisor can help. Such a professional spends his entire day analyzing the market and can offer interesting insights to help you make investment decisions. Always have a trustworthy investment advisor around.
Summing Up
As you can see,stock investments require a lot of planning and strategy. Equity offers an excellent opportunity to investors who are willing to spend time and effort in analyzing, understanding and assessing stocks before investing their hard-earned money in them. If you are considering jumping into equity investments, then follow the tips mentioned above and give yourself a solid start. Good Luck!
