Very often, you hear people making a fortune by making investments in the share markets and get lured to invest all our savings in it. Without a doubt, share market investments have helped investors grow their wealth and achieve financial goals. Investing in the stock market is essential for long-term wealth creation, as the returns generated by equities in the long-run have consistently outperformed the returns generated by any other asset classes, but investing all your money in share market is neither wise nor advisable. Shares are extremely volatile and carry a high degree of risk.
If you are a beginner in the share market and the success stories of others have made you consider shares as an investment option, it is important to understand that there is no quick and easy way to make money in the share market overnight. Investing in the share market wisely requires you to have patience and also an understanding of how the stock market works.
Why should you invest in the share market?
1. Potentially higher returns which help beat inflation
Equity investments have the potential to generate higher returns as compared to other investments in the long-run. One of the biggest challenges in the investment world today is finding investments where returns beat inflation.
2. Dividend Income
At the end of each financial year, a company declares dividends to be distributed to shareholders in proportion to their holdings, from the profits earned in that year. Thus, apart from long-term capital appreciation, investing in shares entitles you to the dividend income.
The shares are listed on the stock exchange and can be bought and sold through the exchange platform seamlessly.
Share market tips for beginners
If you are a beginner in the share market, here are few important stock market investment tips for you to help you guide with your investments
1. Define your investment objectives
Before considering investing in shares, or for that matter any instrument, it is important that you clearly define your investment objective along with the time frame for it.
Investments in the stock market have the potential of higher growth in the long-term but are the extreme volatility in the short-run. If you are looking at investing your money for a fairly long time, you will benefit tremendously by investing in shares as compared to other less volatile assets. As stock markets are volatile in nature, investing for short-term investment needs is not advisable.
2. Assess your risk tolerance
When it comes to investment decisions, assessing your tolerance to risk is extremely important as it is individual for each investor. Share markets are volatile and your ability to withstand the fluctuations in the market is crucial. If your tolerance to risk is low, you are likely to get anxious about your investments; you are more likely to make emotional decisions about investments rather than logical decisions.
However, once you start gaining more knowledge about stock market investments and also understand volatility, your perception will evolve considerably and allow you to take more analytical decisions.
3. Understand the basics of Share Market
Before you start investing in the stock market, it is important for you to have basic understanding of the stock market and the individual securities in the stock market. Getting familiar with financial terms such as P/E ratio, EPS, CAGR, etc. stock selection strategies and stock order type will help in the research and selection process of stocks.
4. Pick the right stocks
Investing the shares is easy, but being successful with your investments requires effort. Whether you are seasoned investors or a beginner, stock selection plays an important role in determining the success of your investments. You should do proper research and analysis of the stocks that you are looking to invest in. Various aspects such as financial soundness, quality of management, competitor’s performance, the competitive advantage of the company will help you understand the strength of the company. You should invest in fundamentally strong companies for potentially higher returns.
5. Do not let emotions drive your decision
The performance of stocks to some extent is driven by market sentiments. If the market sentiment is bearish, it tends to influence the stock price negatively even if the fundamentals of the company are strong. In such situations, long-term investors should not sell their investments just because the market sentiment is negative.
Once you invest in the stock market you should not get influenced by short-term price changes of the securities on the account of speculation, rumours and in general the market sentiments.
6. Keep your expectations real
All of us want to achieve the best possible returns from our investments. But at the same time, it is equally important to be realistic about the return potential. Even though some stocks have generated over 100% returns for investors in the past, it does not mean that every investment in stocks will fetch you similar returns. The idea of investing in the stock market is to have positive returns on your savings which can beat inflation in the long-run and help you achieve your financial goals with ease.
7. Diversify your portfolio
Diversification is extremely important to optimise the returns on your investments. The basic tenet of financial planning is to have a diversified portfolio in different asset classes to achieve your investment objective by not relying on the performance of a single asset class. Even in the case of shares, you should diversify your portfolio in shares of different companies, sectors, and industries to avoid relying on the performance of one sector.
8. Invest only your surplus
Your investments in the stock markets can fetch you high returns in the future. However, unlike fixed-income investments such as bonds and FDs, returns from the stock market are not guaranteed. The higher the chances of returns, the higher are the risk involved.
Hence, you should only invest the surplus funds you have into the stock market without compromising on the other investments such as your life insurance, health insurance, emergency funds etc.
The final word
Shares should be a part of your investments, as they offer huge growth potential, but they can’t be your only form of investment. You need to diversify your portfolio in various asset classes to get maximise your returns and minimise risk for your investments. Your investment objective, risk profile, time horizon all play an important role in ascertaining how much can you and should you invest shares. If you are wondering where to start, then just get in touch with our financial experts from IndiaNivesh to guide you with your investments.Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.