Must read the faq for Indian stock investors (newbie)
Investing in stocks can be a challenge if you are not aware of the markets. However, it is also not true that you would need a first-class degree in finance to be an investor or trader. There are certain things that a newbie investor must understand before they jump into the market. So, here we have created a questionnaire consisting of eleven such questions that every new investor must ask and find the answers to before getting into the stock market.
How much money do I need to start investing?
Often it has been observed that people who are interested in investing don’t do it upfront because they think that they do not have sufficient funds to invest. This is kind of a myth that is prevailing in the market since time unknown. Most people back out from their investment planning due to this reason. On the contrary, the reality is different. You can start investing in shares with any amount you have. You can buy mutual funds for just Rs. 500. So, the amount has never been a constraint in investing. However, the one thing that you should keep in mind and which is like a thumb rule of investment is never invest what you cannot afford to lose. So, if you can afford to lose Rs. 50 lakhs, you can invest the same, whereas if you cannot afford to lose Rs. 5000, invest an amount lower than that.
What’s the benefit of using a discount broker?
For an investor who is new in the market, capital might be a constraint. So, they must use them wisely. Thus, for them, a discount brokerage house can be a good choice. A discount brokerage house provides all the necessary services such as trading, Demat services, and highly advanced technology for the trading software which are the basic requirements for trading. The benefit of using a discount brokerage house is that you do not have to pay hefty brokerage charges like you would have to pay to the traditional brokerage houses. For instance, if you trade with Zerodha or Upstox, you can get the best of the trading software which can enhance your trades and you pay very nominal brokerage charges.
What money should I invest in the stock market, and what money shouldn’t I invest?
The myth of doubling your money overnight should be first kept aside and erased from your brain when you come to the stock market. This market is very rewarding and has various opportunities to earn money. You must invest an amount which you can afford. You should never invest out of greed. Greed is the main villain in the market.
The money that you should invest in the money that you see growing in the future for your financial goals. You should never invest any amount which you cannot afford to lose when the market goes against you.
The best way to invest money is to calculate the future value of your investment. You must always consider the risks as well. One of the most important things to keep in mind is that the longer the term is, the higher would be the profit.
How do I earn above-average returns without taking on too much risk?
In the stock market, there are no rewards without risk. However, the main challenge is to mitigate this risk and increase the profit percentage. For doing so, you have to first keep in mind the proper diversification of your investment. You should never invest in one or two stocks. You must segregate your income into various stocks that are poorly or not correlated at all. This will help you generate income in a different phase of the market. For example, when the stock prices go down, the price of gold increases. So, you must invest some in equity stocks and some amount in gold commodities to earn a return in any situation.
What type of investments should I make?
For new investors, mutual funds can be a great investment. As it is already a bundle of hand-picked stocks, the return is quite good. As you being a new investor do not possess experience or knowledge of the market in-depth, it is better to invest in mutual funds in the beginning at least.
The next thing is bonds, for beginners, investing a part of their investment budget into bonds is a good idea. As you may know, when you are young you can take more risk but that doesn’t mean to invest all your money into direct equities. You can at least invest 20% of your investment budget in the bonds. It will generate regular income as well as these are risk-free investments especially if they are government bonds.
Finally, some stocks should be a major portion of your portfolio. As you are young and can afford to take a risk and learn, you must invest a major chunk of your money into equities directly but gradually after understanding the market and your risk appetite.
When is it the right time to sell a stock?
There can be two answers to this question. One is never but that is a very rare scenario as every business has a peak and a low. It is better to sell the shares of such a business which is going down. However, it also depends on your risk appetite again. If you believe that the low of the business is not going to last, you can still keep your shares.
The second answer would be when the time is right and you need to encash your investment. If you are getting your desired profit percentage, it is better to sell the stocks and book profits rather than being greedy and waiting for too long to see the stock prices going south. One thing to keep in mind is the fundamentals of the company. If the fundamentals of the company start shaking, then withdrawing your investment would be the best choice.
Should I invest in stocks when the market is high?
In simple words, it is not a good idea to buy at a high price. You must buy when the price is low or within the average bracket. However, if you feel the fundamental of the company is good, and the stock is under-priced, though according to the market it is surging, you must invest at least some into the stocks.
Otherwise, when the market is high, try to observe, make a checklist of the stocks to purchase.
Should I invest in an upcoming IPO?
In short, IPOs are not good investment options for new investors. As the company has launched the IPO, their stocks have not seen the bear market yet. The ultimate test of any stock is in the bear market. IPOs, on the other hand, are the product of the bull market. When the market is rising, the economy is good, IPOs generate good profit but if the market gets sloshed, then you can lose your money.
However, there are certain companies whose IPOs have worked like wonder and generated great returns for the investors. It depends on the business model, industry, very strong financials and great management, and most importantly fair valuation of the IPO.
Where can I get the company’s financial report and other information?
The best place to source a company’s financial reports and other information is from the company’s website itself. You can find all the financial statements, reports there. You can also find them on NSE and BSE’s site. Finally, you can find them on financial websites like money control, ET Market, etc.
Is investing in small caps more profitable than large caps?
For a newbie who is not so experienced in the market, investing in small caps might be a little riskier. As the true potential of the small-cap companies is untested. If you are beginning with your investment, it is better that you start with large-cap companies’ stocks. As these companies are already in the market for a long. Everyone knows their worth and they help you generate a fair return out of the market. However, as you gain knowledge of the market, try to tap the hidden gems in the market which are the small-cap companies. There are innumerable of them which can boom as grow faster than any large-cap companies.
What kind of stocks should I avoid?
Finally, as a new investor, you must first know which stocks you should avoid. Firstly, you must avoid investing in any stock which is not so liquid. This means where there are fewer buyers and sellers for the stocks. Then comes the penny stocks, this should be avoided as well by a new investor as penny stocks are more prone to scams and are highly risky.
So, for a new investor, these few things are like a check-list and they must keep in mind to generate a good return from the market.
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