In the stock market, it is vital to plan your finances in such a way that your profits are more than the losses in the long run. In India, out of approximately 22124.14 INR billion household savings, only about 2% goes as an investment. This low percentage is presumably because people don’t have enough knowledge about the share market. But, if you want to be a successful investor, you can learn and equip yourself to identify the incentives and the different risks associated with an investment. Possessing clarity about your goals will help you remain focused for better and faster results. To achieve this, you must have an investment strategy.
Let’s take a look at the top four important factors to take into consideration before investing in the share market.
1. Identify Your Investment Opportunities
As a new investor, you can either invest in shares individually or invest in mutual funds and take the help of a fund supervisor to do the job for you. Know the various options that the stock market has to offer, and determine which the most beneficial opportunity is for you. For example, an investment of ₹ 1 lakh in 2008 would have given you 250 shares in an automobile company, each share costing ₹ 400 approximately. Today, the worth of your investment would be ₹ 57.2 lakhs. Thus, by identifying the right stocks, you can generate wealth in the long run.
2. Diversify Your Investment
With an estimated number of 5689 listed companies, The Bombay Stock Exchange (BSE) of India has the highest number of listed companies in the world, and the National Stock Exchange (NSE) of India has over 1750 companies. Prudent investors own stocks of different companies in various businesses, sometimes even in multiple countries, with the belief that a single adverse incident will not impact all of their holdings. Thus, you have endless companies and opportunities that you could invest in, and if you want to have a higher return on investment (ROI), a sound approach is to invest in three to five companies simultaneously.
Suppose you own stocks in three companies from different sectors, each of which are expected to grow profits. Unfortunately, the first company’s assets were dissolved to pay off a massive lawsuit. However, the other two companies worked well, and their stocks rise to 25% each. With diversification, you will get to recover from the loss of your total investment in the first company by gains of the other two companies. Thus, you need to determine the value you want to invest and then diversify it to reduce risk and increase your chances of gain.
3. Understand Your Risk-Taking Ability
Always remember one fundamental rule in finance – if something gives you higher returns, it usually carries a greater risk. For instance, a relatively less profitable company will pay you a higher rate of interest on your deposits. The same logic goes for stock investment too – they yield higher returns than bank fixed deposits because they are riskier. Thus, the money you invest in the market depends on your ability to bear the risk. You need to have a stable financial strategy to support your investments. Analyse your cash flow, your financial standing, and the risk threshold before buying stocks.
Obtaining a high ROI through your investment would help you retire early, but don’t be surprised quite yet. For every company that made it big, there are dozens that failed. The possibility of losing money by investing in stocks is what we refer as to as market risks. Investing in stocks can also involve another type of risk – company-specific risk. This can occur due to reasons such as the failure of the administration and poor quarterly results. When it comes to liquidity risk, it is the possibility that an investment can’t be bought or sold quickly to avert or minimise a loss. The risks mentioned may not necessarily affect your portfolio. But, seeking professional guidance may help alleviate concerns that could otherwise result in impulsive investment decisions.
4. Have A Contingency Plan
Considering an investment in the stock market may not be entirely secure, it is advised to have a backup plan, also known as an emergency fund. The purpose of this contingency fund is to help you in case of a crisis. Contingency planning is not just about significant accidents; it’s also about preparing for small-scale emergencies such as the loss of information, suppliers, people, and other disruptive unknowns. That’s why it’s essential to make contingency planning a regular part of the way your business runs. You wouldn’t have to withdraw from your investment in the share market if such a situation arises, but instead, you can meet your urgent requirement with these stocks. Ideally, owning an amount that could last you for 6 – 8 months without any other income is regarded as a basic level of an emergency fund. Based on your earning and expenses, if you want to have an emergency fund of ₹1 lakh, then you should put aside about ₹5,000 or ₹10,000 every month.
You don’t have to be worried while investing in the stock market if you’re a new investor. Simply spend time in grasping the workings of the stock market and review the different options that you have. Select the ones that suit your needs, and outline your investment strategy for a good return. If you don’t have your own meticulously designed set of investing practices, start by incorporating the points mentioned above and also share insights with the people who have had a breakthrough success in their investing careers.