New to the Stock Exchange? Here are 7 basic rules to follow before investing

Investing in the stock market can be exciting and scary at the same time. Although the returns are attractive, the risk factor can be daunting at the same time.

However, if you are considering venturing into the stock market, one of the first things that comes to mind is to learn the basics of stock market investing.

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There are examples of people making a fortune and effectively generating a second stream of income through a well-managed and directed approach to stock market investing.

However, stock market investments are subject to market volatility and risk. For a beginner, it is crucial to exercise caution and ensure that any decision to invest in the securities is backed by proper research and studies.

Jyoti Roy, DVP- Equity Strategist, Angel One Ltd outlines 7 key points for a beginner to consider when entering the market for the very first time:

Do not expect too much from stock market investments

While a balanced and planned approach to stock market investing often pays off, it’s also essential to understand that the market is not a magic wand or a genius.

A beginner should realize that expecting exponential results in the long run might be the wrong approach to the entire investment journey.

Determination of the initial investment

There are different ways for a beginner to initiate stock market investments. Either a lump sum could be invested in different stocks or a systematic investment plan could be followed.

A fixed amount could be invested in securities such as stocks and mutual funds. The first step before a beginner is to make sure of the amount of money he wants to IPO by one of the two methods.

Determination of the investment objective

Even though this advice seems pretty basic, any beginner should determine the exact goal to take the big step of going public.

An individual’s investment goal depends on their risk preferences and life goals. It could be a trip abroad or a dream house.

It is not vital to have a big goal, but its determination before the investment journey can begin is crucial.

Understand the different ways to invest in the stock market

There are several ways for a beginner to approach the stock market journey. For example, a diversified portfolio could be created consisting of debt and equity securities.

The beginner might also consider index funds which are replicas of indices such as Sensex and Nifty and are operated by many financial institutions.

You can also take advantage of robo-advisors that many fintech players have introduced recently. These robo-advisors are AI-powered mechanisms that consider historical patterns and the performance of individual stocks and suggest expected performance to investors.

Since serious research and quantitative analysis back up the advice, they are extremely reliable.

Inclusion of diversification in the portfolio

Again, this point may seem relatively simple; novice investors often miss this. Bullish sentiment in the stock market could lead to upward movements in stocks, indices and derivatives.

This could encourage newbie investors to pour more money into wallets than expected. However, it is always advisable to stick to the initial corpus that was decided in the first step.

Also, putting all the eggs in one basket can provide a higher yield (sometimes), but often it can lead to losses. Therefore, having a balanced portfolio is crucial to reaping the benefits of diversification.

This means putting money into different options such as debentures, bonds (fixed market securities), stocks (large, small and mid caps) and index funds. The proportion of investment in each option is based on individual risk preference.

Avoiding too much risk early in the investment journey

Beginner investors are advised to avoid high-risk securities such as futures and options. These derivative securities could suffer high losses as there is no downside protection in these alternatives.

The investor could lose the entire corpus, which is not possible when a diversified portfolio is created.

Monitoring, review and follow-up of the portfolio

Based on the expected period for which the investment is planned, a beginner should always follow, review and monitor the prices of securities and what companies have been doing.

For example, if an investor has chosen Maruti Suzuki to invest in, in addition to tracking the performance of the stock, it is essential to consider various factors such as industry and company-related news. This will help to better understand the market and understand the reasons for the price movements.

Summary

Investing in the stock market could be extremely rewarding. However, it is also important to understand that there is no better teacher than learning from your own mistakes.

Therefore, a beginner should exercise caution and enter the stock market in a planned and organized manner. The overall probability of incurring losses could be the lowest and the chances of earning a reasonable return are higher.

(Disclaimer: Opinions/suggestions/advice expressed here in this article are investment experts only. Zee Business suggests its readers consult their investment advisors before making any financial decisions.)

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