Investing in the stock market is no longer a complicated or demanded activity. The move to digital has enabled investing and trading easy for beginners and efficient for professional investors. Setting up a demat account and trading account are 20-minute exercises that give you access to you the online stock market in India and abroad. Despite the ease of investing in stocks, there are few things you should remember before you take the plunge into investing in financial markets.
Set Financial Goals
Setting financial goals before you start investing is extremely important. Without a proper plan on what you want to spend your money on and how much you need to save, investing becomes an aimless exercise. You may think that it is better to have your money invested in the stock market rather than lying idle in your savings account, in wait for you to formulate your financial goals. But with the sheer diversity of stock investment opportunities, you wouldn’t know where to enter or exit if you don’t set a few broad financial goals on the horizon. Financial goals help you determine how long you need to stay invested and how much you need to invest. It also informs your investing strategy which is crucial to make your money grow. Companies and stocks you choose to invest in are a by-product of clear financial goals
What kind of an investor are you?
Figuring out what kind of an investor you are without ever having invested a rupee in the stock market is difficult. But here a few questions you can ask yourself before investing:
1. Are you driven by value or growth
Value investors are the type of investors that invest in the stocks of companies that they believe are intrinsically valuable because of what they do. They invest in these stocks because they have undertaken a thorough financial analysis of the company – revenue, cash flow, profits, historical performance and pick up the stock when it is trading below its book value or true value. The reason value investors seek companies with good solid fundamentals is because they are willing to bet that they will perform well in the long term. Then, they wait for the price of such stocks to fall below their actual price and pick them up quickly and hold on to them till they hit the target price they have in mind.
The rationale behind value investing is that when you determine the true and intrinsic value of a stock and buy it at a discounted price, you are less likely to lose money if the stock doesn’t perform as per your expectation on the downside. But on the upside, not only will the stock rally back to its true value but incremental growth on the true value of the stock means you earn that much more on your investment. As a budding value investor, you can look at the stocks of large-cap companies and wait for their prices to dip before purchasing them.
Growth Investors, in contrast to value investors, are more aggressive. Growth-based investment focuses on capital appreciation and is targeted at young companies in their growth stage. Growth investors are investing in the potential of the companies, and when such investments pay off they pay big. But if the company doesn’t unlock its full potential, you stand to lose even the principal amount you invested.
2. What is your risk appetite?
While we are on the subject of growth investment, it is a good time to evaluate your risk appetite. How much money do you want to make and how much money are you willing to lose to make it. Understanding your risk appetite before you invest will help you filter out what kind of companies and financial instruments you want to invest in. While no one recommends that you invest in only one kind of security, you can invest more of your savings in any kind of security over another depending on how safe or aggressive you want to be.
If you are looking for extremely safe short-term investments and liquidity, debt instruments are the way to go. If you plan on staying invested for long and are saving money to buy a home (financial goals!) then equity-based mutual funds, safe stock options, gold etc. are suited to your needs. For a keen, astute investor with a background in capital markets and finance, day trading and F&Os and trading in commodities will provide umpteen opportunities to deploy your expertise and earn from it.
3. How old are you?
It’s never too late to start investing, but your age does determine how much exposure you ought to give your portfolio to different asset classes. There is a rule of thumb that prescribes that 100 minus your age is the amount you should place in equity in the stock market. The younger you are, the more time your investments have to mature to their full potential. As you grow older, you can place your savings in safer, short-term instruments as you approach those financial goals you set for yourself and may want to exit quickly.
4. Are you a long-term investor, a day trader, or both?
How long you want to stay invested and whether you want to trade are an outcome of your financial wherewithal and aspirations. Day trading, arbitrage trading, investing in stock abroad is the domain of professional investors, hedge fund managers, and financial institutions. Over time, you can build the expertise yourself. But if you are a keen learner and have the liquidity to experiment you can attempt day trading as well. Research, however still remains a prerequisite to any kind of investment in the stock market – even day trading. Contrary to popular opinion, day trading isn’t based on intuition or luck but on careful planning and strategizing.
Know your investments as you know yourself. Creating a proper plan for stock market investment is the surest way to make your money grow. With proper research and patience, and strategizing, your investments will only appreciate.