Things one should know before investing in stock markets
The stock markets are always a lucrative option for investors. However investing in this market is not easy. It requires lots of patience and discipline, research and understanding of the markets. Added to this, the stock market volatility in the last few years has left investors in a dilemma as to how to invest, hold or sell in such a scenario.
Here are the ten quick things to be known before investing:
Invest only the surplus: If a person wants to explore the stock markets it is always advisable to invest only the surplus money.
Risks associated with investing: There are various risks associated with the stock market. The two primary risks the investors have to take care and be aware of are:
No guaranteed return: There are some stocks which have performed historically well over a long period of time. However there is no guarantee that it will continue to do so for ever or even if the company continues to stay in the business.
You may lose money: Stock prices may vary, often drastically for many reasons with no pre indications, especially when the trader has not planned for long term investments.
Do Not Time the Market: Stocks are long term investments plans with many short term price fluctuations.
Investors should always remember that they are not going to lose money on the purchased stocks until they are selling them off. Often investors make the mistake of selling the stocks as soon as the price starts falling, in panic.
Technical Analysis: It is a form of forecasting stocks on the basis of historical price data and to analyse the tendency of these stocks to behave similarly over a repeated time period. It involves the study of various parameters like averages, trend lines, oscillator, patterns etc. Traders who learn technical analysis can boost their financial status and be more confident about their decisions.
Paper trading: Paper trading involves the use of stock market simulator system with hypothetical account balance to trade in the securities. The trade is just on papers and involves no real money. Theoretically it gives best practice for those who are new to trading.
Trading in a simulated market has many benefits, such as
- Observe the market behaviour with no cost and no risk involved.
- Developing own trading strategy, testing , correcting and retesting it.
- Rebuild self confidence when one is on a losing track.
Discipline: Historically it has been seen that even bull markets have shown some panic movements. The volatility in the market has inevitably made the investor lose their money despite the bull run in the market. However the investors who have invested in systematic investment plans and have stayed the course for the long termhave able to generate great returns. Hence it is prudent to have a disciplined investment plan.
Risk & Money Management: For a trader money management is one variable that gives a cutting edge to trade in stock market. Investors cannot control the market spikes but surely they can manage their money in every transaction they make.
One of the best technique of managing one’s money is by using the stop loss tool. It is most useful for those who are not able to monitor their stocks on a regular basis. It works on the principle of automatic triggering for execution of an order when the set threshold value of the stock price is reached. There are no hard and fast rules for setting the stop loss percentage value. This completely depends on the individual style of trading.
Diversified Portfolio: An investor can minimize the risk associated with the stock trading by holding diversified stocks in their portfolio. One can diversify portfolio in many ways like holding stocks of companies operating in different industries so that even if one industry is not performing properly other stocks in the portfolio will not be affected.
Remember a Stock is really a Company: It is always better to invest in a company that will grow in future. Going by this fundamentals one can always increase the chance of earnings from a stock. Factors like ROCE, Dividend Yield, Cash Flow, PAT, PE, EPS of a share enable investors to study and make the right calls on investing in a particular stock.
Investing in Stock Markets: 4 Reasons People Get Stuck
Many are unwilling to start investing in Stocks. This may be because of the following reasons
- You don’t know what to do
- You don’t know how to do it
- You don’t have the authority or resources to do it
- You’re afraid to take risk
To overcome the above, the best option is to utilise professional fund managers to assist and direct on stock selection.
Why investing in stock markets can be beneficial for your Long-Term Goal
Investing for the long term offers a number of advantages that investors who try to time the market, or day-trade over the short term, simply can’t take advantage of. Few of the advantages are:
(1)Invest for Long term and forget about short term volatility
(2) Long term investments are highly tax efficient
(3) Frequent buying and selling of stocks proves costly
Every time we transact, we end up paying brokerage, commissions, taxes etc. So a better strategy is to follow a research strategy. Picking up the best stocks which looks fundamentally strong and undervalued is advisable. It is good to buy those stocks at once and stay invested for long term.
(4) Long term investment advantage is felt best with power of compounding
Suppose a person wants to accumulate a corpus of Rs 1 crore and the investment opted for will give an average return of say 15% per annum. If the goal is to be achieved in 5 years, then Rs 1.14 lakhs per month is to be invested. If the goal has to be achieved in 10 years, Rs 38,000 thousand per month needs to be invested. If the goal needs to be achieved in 20 years, one must invest Rs 7,500 per month.
The longer one keeps money invested, the faster it will grow. The same principle applies in case of stock markets. It takes a minimum of five to seven years to note the visible benefits of stock investing.
Illustration of Comparative Study of Post Tax, Post Expenses Returns for Investment under Equity Mutual Funds, Bank Fixed Deposits, ULIPs and Insurance Policies
Assumptions:
Highest Tax bracket is assumed.
Annual Investment of Rs.15,000 in form of SIPs(MFs) or premium(Insurance Policies and ULIPs) in each of the investment products.
Note:
Investments in Equity MFs and ULIPs do not attract tax if invested for more than a year.Maturity proceeds from Insurance policies are exempt from tax
For an overall understanding of Analysis of Returns in various asset classes with co-relation details please refer https://dilzer.net/2015/09/30/analsysis-of-returns-in-various-asset-classes-with-co-relation-details/
Debalina Roy Chowdhury
Para Planner Dilzer Consultants
Sources
http://www.getmoneyrich.com/long-term-investment-advantages/
21 October 2016