If your research on equity brought you here to learn about the basics of the Indian equity market, you've already taken the first step into a financially sound future. There's nothing more exciting than diving into the ebb and flow of the stock market. The nuances of equity shares may seem a little cloudy at first, but armed with correct information of the share market basics, you won't be struggling anymore.
Your ultimate checklist before venturing into the equity market
- Deep dive into the fundamentals of the company :
Warren Buffett famously says he doesn't invest in what he doesn't understand. And we should all probably pay heed. These questions may seem basic but are extremely crucial before investing in the equity market. What does the company do? Is the company profitable? What is the company's earnings history and outlook? What is the company's stock valued at? Who are its competitors? How clean is the company's balance sheet? What is the investment style of the holdings in their portfolio? Check for red flags. There are plenty of places to look- Company's website, stock market news, Wikipedia, forums, market research companies reports. The Internet is your gold mine.
- A thousand low-performing stocks vs. one highly profitable one - your choice :
A seasoned investor is on the lookout for bargain stocks - the ones available for prices lower than what they're worth and have a strong growth potential. However, most people fall into the trap of buying cheap stocks for high gains. Returns from your investment in share market do not depend on the number of shares, but the performance of the company. Your chances of profiting are higher if you buy just one share of a first-rate company rather than buying thousands of petty stocks.
- Look beyond now :
Why do you want to invest in the Indian stock market? Will you need your cash back in six months, a year, five years or later? Are you saving for college expenses, to purchase a home, for retirement, or for a child's marriage? If you're looking to make quick profits for short-term gains, you have to learn to time it right. Stock prices are highly volatile over short periods. So profits are yours if you can clinch the deal at the right time. But if you're in the equity market for the long race, be assured that you 'll get positive dividends after 3 years or longer. There's tax benefit too! The income profited from stocks held for more than a year is considered as a long-term gain and is free of tax. But you have to pay short-term capital gains for investments less than a year.
- Make a portfolio and nurture it :
Buying stocks and ignoring it - that's a risk you don't want to take. Investing in the share market is a full-time job. The economic environment is so dynamic, the local and global policies keep changing and the company itself might alter its strategies or management. These factors can affect your investments directly. So you need to fix a keen eye on the trends and learn to analyse the stock market. Review occasionally, if not every day. One smart way to keep a check is to set a stop-loss instruction for your stocks. When the price of a stock reaches the stop-loss level, the broker will sell them. So by setting a stop-loss order at 10 % below your purchasing cost, your can limit your loss to 10 %.
- Know when to let go :
You might be tempted to hold on to your stocks even if they're sinking in losses. That's because emotions take over and you hope that your stock will bounce back and reap benefits. This often results in bigger losses. And the decline of prices in stocks is an irresistible trap. Some investors buy more shares when the prices dip to reduce the average cost of their portfolio. Buying on dips is recommended only when the drop is due to a temporary setback and growth prospects remain high. If the outlook of a company improves, or remains stable at least, you should buy more or hold on to your stocks. But if the stocks no longer hold the assumptions with which you started, it might be the right time to sell off.
- Know when to enter and exit :
The Indian stock market can be quite dramatic while reacting to news, of both rise and fall. The price of a share should ideally be proportional to the total capital and earnings prospects of the company. However, market frenzy leads to shares being, generally, overpriced or under priced. So when the market is bullish, people follow the herd and buy over-priced shares with the hope that prices will keep rising. Conversely, in a bearish market, investors tend to sell away shares with the projection that the prices will keep plummeting, when they actually should be looking closely for bargain-stocks. If you want to be a smart investor, buy shares of a company with strong fundamentals, when it's beaten in the market and sell when prices surge.
- Be prepared to lose money :
There are risks involved in any equity market and that's probably one of the reasons why you're scared to start investing. But if you get into it armed with the knowledge that the returns might be uncertain at times, it won't be as scary anymore. There is no guaranteed return on stocks. Stock prices sink and rise often drastically for many reasons, sometimes with no pre-indications. Some stocks might have fared excellently in the past but there's no guarantee that the rise will continue. A sensible way to manage risks is to invest only the surplus that you can afford to lose, and yet won't disturb your living conditions. Never sell your assets for investment in the hope of multiplying it. You might lose it all if you don't have a back-up plan.
- Back up tips with your own research :
One of the first rules of investment advice is to never follow a stock tip without doing your own homework. Tips are crucial to kick start but staying up-to-date with stock market news and trends, best performing stocks in the market, and your stocks is imperative. Observe the market behaviour regularly. Overtime develop your own trading strategy, test it, correct it and retest it. And if a successful investor shows you their work, check it and use it as an opportunity to revisit your own.
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- Net annual earnings on your capital
- Period of your investment