If you wish to start investing in the stock market, it is instrumental to possess a fair understanding of stocks and shares. Regular investment along with avoidance of financial risk can help you save a significant amount of money over a period of time. Following are a few tips that can help beginners save money for the future.
- Set Your Objectives
Setting long-term objectives can be of great benefit when investing in stocks and shares. Whether you wish to save for your own retirement or for your child’s education expenses or to buy a property or any other reason, setting long-term goals will help you better understand the importance of saving. In case you wish to invest in a scheme or investment instrument for a short period of time and withdraw your funds after a few years, another investment instrument can be considered for investment as the volatility of the stock market offers no certainty on whether or not you can access your funds when required.
Your investment portfolio will grow based on factors such as the amount of capital invested, the tenure of the investment and the net annual earnings on the capital. It is advised that you begin investing as early as possible as it can help you save a significant amount of money.
- Level of Risk
The level of risk associated with the investment option you choose must be carefully analysed before you put your money into something. The best way to identify the risks associated with various products and identifying the best option is to conduct a comprehensive comparison between the different schemes. Doing so will enable you to figure out what level of risk each product holds and you can invest your money accordingly. Understanding the level of risk involved with investments will help you avoid those instruments that have the potential to see you incur losses.
- Control Over Emotions
One of the primary requisites of investing in the stock market involves controlling your emotions. The market sentiment towards a company becomes evident through the price of its shares. For instance, if most investors are sceptical about the prospects of a particular company, the prices of stocks and shares will reduce. Similarly, when investors show confidence in a particular company, the prices of its stocks and shares will increase. Investors who are positive about the market are called “bulls” and their negative counterparts are called “bears”. The change in prices of shares is affected by the persistent conflict between the bears and bulls, and the short-term changes in prices are influenced by speculations, rumours and emotions instead of systematic analyses of the prospects, assets and management of the company.
As stock prices keep changing, investors start to feel insecurity and tension, creating questions like whether or not they should sell their stocks in order to avoid losses or if they should retain the shares and hope for a rebound in prices. Since actions are primarily driven by emotions, it is essential to ensure that all factors are analysed carefully before making a final decision.
- Study the Stock Market
Prior to making an investment, a beginner in the stock market is advised to study the stock market for the basics including the various securities that compose the market. The fields that must be focussed on include order types, financial definitions and metrics, various kinds of investment accounts, timing of investment, methods of selecting stock, etc. Gaining a thorough understanding of the stock market will ensure that you’re in a good position to assess risks and make the right selection.
- Diversification of Investments
Diversification of stocks is mainly done by expert investors after all the research has been performed to classify and calculate the risk associated with their investment. However, beginners will have to gain some experience in the stock market before undertaking the diversification of their investments.
Diversifying exposure is among the most preferred methods to manage risks. If you purchase stocks from five different companies and expect the prices of each investment to grow continually, there may be situations wherein two of the companies may have performed exceptionally, acquiring a 25% increase in price, the shares of two other companies may have increased by 10% each, and the shares of the fifth company were liquidated to clear a huge lawsuit. Since liquidation of shares results in a loss for the investor, diversification can help you recover that loss through profits from the other companies, thus making it better for the investor than it would have been if he / she had to invest in only one company.
- Avoidance of Leverage
Leverage is when you borrow funds and use it to put your stock market plans into action. For margin accounts, brokerage firms and banks can grant loans to purchase stocks, generally 50% of the face value. So in case an investor decides to purchase 100 shares for let’s say Rs.500 each, the total cost would be Rs.50,000, the purchase can be completed by a loan of about 50% (Rs.25,000) from a brokerage firm.
Using borrowed funds has an effect on price change. For instance, if the price of each share increases to Rs.1000 per share and the investor decides to sell it, his / her return on investment will be 100% if they had used their own funds (Rs.1 lacs minus Rs.50,000 divided by Rs.50,000). In case Rs.25000 was borrowed to purchase the stock and if it was sold for Rs.1000 each, the returns will be 300% (Rs.1 lac minus Rs.25,000 divided by Rs.25,000) after the loan worth Rs.25,000 has been cleared.
The prospects are great when the price of shares increases. However, a decline in shares means that you will lose a good amount of money on your initial investment in addition to the cost of interest payable to the broker.
Following these simple tips will enable you to gain a good understanding of the stock market and invest your money into instruments that can help you make significant profits over a period of time.