Among various investment options available, the stock market offers one of the best potential returns to investors. However, investing in stocks can be risky since the price of a share depends upon its demand and supply, which is governed by the overall investor sentiment. Hence, it is important to keep certain things in mind before you dive into the share market.
• Know yourself – Each individual has a unique investment requirement based on his/her financial goals, investment horizon, and tolerance to risk. Before you start investing in stocks, it is important to define these three aspects:
o Financial Goals – While we all desire high returns on our investments, knowing exactly what we want to achieve can help us choose investments efficiently.
o Investment Horizon – When you invest in shares for the long term, the type of companies you choose will be different compared to medium or short-term windows. Hence, knowing this is important too.
o Risk Tolerance – Returns are usually directly proportional to risks. In other words, higher risks = higher potential returns and vice versa. Know how much risk you can take without panicking.
• Avoid emotion-driven investing – Whether it is a market crash or a sharp rise, it is easy to get driven into selling or buying because you allow your emotions to make decisions for you. This is usually counterproductive. Always keep your focus on your investment plan before making any decision.
• Diversify – Don’t put all your eggs in one basket. Diversification is the key to successful investing as it allows you to minimize losses and ensure steady returns.
• Don’t borrow to invest – If you use borrowed money to invest, then you can be left with a loan to repay after suffering a loss which can be detrimental to your financial health. Also, ensure that you use the leverage provided by the broker judiciously.
• Avoid following investment advice given on news channels or websites blindly. Research before you invest.
• Don’t try to time or predict the market
• Keep your expectations realistic. While every investor would love to have a multibagger stock in his/her portfolio, there is no formula to finding such stocks.
• Ensure that you monitor your investments regularly.