Modules for Beginners
Basics of Stock Market
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Now that you know the ins and outs of why to invest, it’s time to move on to the other two important aspects of investing – the when and the how. Both these questions are quite tricky to answer, because what works for you might not always work for someone else. Nevertheless, let’s look into the first (and the easier) part of the question – the when.
What is the right time to start investing?
The answer to this question may well just lie in this popular quip: The best time to invest was yesterday. The next best time is now.
This essentially means that the right time to begin investing is ‘as soon as you can.’ Ideally, you should begin investing right from the time you receive your first pay check.
The answer seems to be pretty simple, isn’t it? However, there’s a catch. Your financial situation plays a huge role in determining the right time to invest.
Look at 25-year-old Pranav, for instance. He took home his first pay check a couple of years back. But at that time, he was 23 and already had a couple of loans to his name. Most of his salary went towards settling those debts. The rest of his pay check covered his regular expenses, leaving no room for investing.
Like Pranav, if you too have various other financial obligations, it may not really be feasible for you to start investing right from the time you receive your first salary. But that’s okay. It’s best to get your high-interest debts cleared before you commit to an investment.
Start off small, but start early
A common misconception is that investing is only possible when you have a lump sum amount saved up. But that’s not entirely true. You could start by investing small amounts. It doesn’t matter if these small amounts are only a tiny fraction of your income. What’s more important is that you start your investment journey early in life.
To see just how much of a difference it can make, let’s look at what Pranav and his colleague did.
- Remember 25-year-old Pranav? He wishes to retire at around 55 years of age.
- His debts now settled, he starts investing Rs. 10,000 each month in a scheme that offers a 12% rate of return.
- When he retires 30 years from now, he will end up with approximately Rs. 3,52,99,138.
That’s around Rs. 3.5 crores! Amazing, isn’t it?
- Now, let’s look at his colleague: 35-year old Dev. He’s only just started his investment journey. And like Pranav, he also wishes to retire at 55.
- However, his investment period has dropped down to 20 years.
- To compensate for the shorter duration, Dev invests Rs. 20,000 each month (instead of Rs. 10,000 like Pranav).
- Even then, Dev will only end up with Rs. 1,99,82,958, which is almost Rs. 2 crores.
Comparing 3.5 crores with 2 crores, you see that even after increasing the investment amount, Dev’s corpus is still nowhere near Pranav’s. And why does Pranav have the edge here? Simply because he started investing earlier than Dev.
Golden Rules of Share Market Investment
While there are no shortcuts to success in the stock market, we have uncovered certain golden guidelines that may help you generate larger returns from your stock market investments.
- Stay away from the herd mentality
Herd mentality, or what others are doing, influences the majority of stock market investing choices. To prevent herd mentality, don't buy stocks based on what your friends, coworkers, neighbors, or others are doing. Conduct your own research and invest only in stocks that suit your financial goals.
- Make wise choices
When investing in the stock market, you must consider both fundamental and technical variables. Data isn't always readily accessible in certain businesses, so you'll have to work extra hard to discover and assess it. Similarly, management has the ability to modify balance sheets. As a result, rather than investing in stocks solely on their face value, you should do extensive study beforehand.
- Have a sensible investment strategy
Fear, greed, and an inability to control one's emotions cause many investors to lose money in the stock market. In a bull market, investors attempt to speculate on a stock or develop large stakes in the hopes of making more money, but they end up losing money. During a bear market, investors panic and sell their stocks out of fear, resulting in significant losses. You may build money in a healthy way by taking a sensible, non-emotional attitude to your stock market investing.
- Make a Portfolio with a Wide Range of Assets
The key to achieving strong returns in the stock market is diversification across multiple asset classes and instruments. To do so, avoid sector or theme-based investments and instead build a diverse portfolio of shares from several industries such as FMCG, health, and automobiles.
- Keep your expectations in check
When investing in the stock market, it's important to keep your expectations in check. Unfortunately, if you expect to generate a 50% profit in a year, share markets may not be for you. So, set a reasonable return estimate for yourself and book gains when you perceive an opportunity.
So, when should you invest?
All things considered, it’s advisable to start investing as early as possible, so your investment can grow over a longer period. Start by investing small amounts systematically. Once you’ve cleared your high-interest debts (like credit card dues and high-interest personal loans), you can focus on investing a greater portion of your income.
Also, investing is not a one-time affair. It’s something that you do consistently over the course of your earning years, so you can meet major life goals that are lined up in your future.
The most favourable conditions for investment
One of the most favourable conditions for investing in a stock is when its prices are low. Buying a stock when it is on a high puts you in a precarious position since the prices may correct once you’ve bought it, which may leave you with heavy losses. That said, when you invest in a stock whose prices are at a low, there’s still a chance for that stock to go down further, but the impact would most likely be minimal. And the stock has a greater chance of bouncing back up, leaving you with handsome profits.
Other factors to be considered for investment
You’ll never know when the right time to buy a stock is unless you actively track its movements. Start off by looking for any news or announcements that can affect its price. Announcements such as dividend payouts are considered to be favourable and can lead to a rise in the stock price. Also, keeping an eye out for technical indicators can also help you predict the price movements. We’ll see more about technical indicators in the forthcoming modules.
How to invest?
Phew! The when was quite straightforward, wasn’t it? The question of how to invest money, on the other hand, is a bit more intricate. That’s because there are many ways to invest. The right answer to how you should go about investing your money really depends on various factors like your financial obligations, your income and your life goals, among other things.
Nevertheless, there are some tips and tricks that can help you get a better idea of how to invest your money and maximise your returns. Let’s explore a few of these ideas.
Align your investments with your goals
Before you mobilise your funds for investment, think about your financial goals. It is always a good idea to chart out a timeline and classify your goals as short-term or long-term targets. This gives you the clarity needed to plan your investment strategy better.
Then, pick and choose your investment options according to your short-term and long-term goals.
For instance, to meet your short-term goals such as buying a new car or a new bike, it’s better to invest in a highly liquid short-term investment option like an Equity Linked Savings Scheme (ELSS).
To satisfy your long-term goals such as sponsoring your child’s education or marriage, it makes more sense to invest in a long-term option.
Invest according to your risk appetite
Your risk appetite is a really good metric to determine the investment options that are right for you. Analyse your risk tolerance comprehensively before moving on to the investment phase.
There are plenty of online calculators that you can use to determine your risk profile. Your age, financial standing, your knowledge of investments and other financial obligations are some of the many factors influencing your risk appetite.
If you’re a conservative, risk-averse investor, you’re better off investing your money in government-funded schemes and fixed deposits. If you’re okay with taking risks every now and then, you could invest in mutual funds. On the other hand, if you’re an aggressive investor who thrives in risk, the right option for you would be equities and commodities.
Diversify your investment portfolio
The old adage goes like this - Don’t put all your eggs in one basket. This rings particularly true with respect to investments. It is never a good idea to invest all of your money in a single investment option, because if your investment does not perform well, there’s a high chance that you could end up losing your capital.
By diversifying your investment portfolio, you can reduce this risk significantly. You could diversify your portfolio in many ways. One way to do this is to include different kinds of investments, such as low-risk and high-risk options. You can also do this by including investments across various sectors.
For instance, if you’re investing in equity, you could include stocks from industries like banking, healthcare, travel and tourism and FMCG. This way, the risk is distributed more evenly across various industries, thereby lowering your chances of losing your investment capital.
So, that brings us to the end of when and how to invest your money. Of course, you’re also probably wondering about where to invest your funds. The coming modules will throw more light on the investment options available to you.
A quick recap
- The right time to begin investing is as soon as you can, so your investment can grow over a longer period.
- Start by investing small amounts systematically.
- Once you’ve cleared your high-interest debts, you can focus on investing a greater portion of your income.
- Invest consistently over the course of your earning years, so you can meet major life goals.
- Align your investments with your life goals.
- Take your risk profile into consideration.
- Remember to diversify your portfolio.