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Points to Keep in Mind Before Starting Investing in Equities

  • Amith G
  • Nov 04 2021
  • 6 minutes
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Stocks have attracted investors of all classes in the Indian markets since the start of stock markets in the country. For an average investor, stock markets have always been a risk mine which they fear to navigate. However, in the recent past, this trend is changing with many new investors taking the plunge in the market, especially post Covid 19 pandemic. 

However, there is still a vast majority of them that do not have the optimum knowledge relating to stock investing or the sources for the same. Therefore, such cases may lead to errors in stock investments that can even drain their life savings. Hence, it is important to learn the basics of stock investments to have a profitable portfolio. 

Given below is a list of such points that have to be remembered before starting trading in equities. 

Top points to consider before starting investing in stock market

a. Understanding the basic risk-return profile

The starting point for stock investments is the correct assessment of the risk-return profile. It is prudent to devise a structured investment plan with set rules and disciplines that have to be followed by the investors. This is to ensure that novice investors do not invest in overly risky stocks and burn out quickly. 

b. Learning the basics of stock markets investments 

Another important aspect is to understand the basics of the stock market and the rules and guidelines of investment in stocks. There are a lot of concepts that need to be studied thoroughly like fundamental and technical analysis of the stocks. 

c. Choosing a stockbroker to open a Demat account

The basic need for stock investing is a good stockbroker. The basic guidelines for a good stockbroker are factors like good customer support, lower charges of the Demat account, ease of access and trade with a structured pattern, access on multiple devices, etc. Selecting a stockbroker with all these features is like winning half the battle as investors get the ease of investing efficiently. 

d. Careful analysis of the financials of the company 

The fundamental and technical analysis of the stock based on the financials of the company and the demand-supply functions is crucial for every investor. It helps the investor know the viability of the stock and the relative position of the company among its peers as well as in the industry as a whole. 

e. Using only surplus funds to invest initially and not pump in too much capital

One of the common mistakes by new investors is pumping too much capital into stocks. In the initial days, it is advisable to invest in low to moderate volumes as well as quality stocks as part of the learning process. Also, investors should always remember to invest only surplus funds they have so it does not create a hurdle in their routine financial obligations. Investments in stocks by using emergency funds are quite dangerous as the volatility of the markets can potentially drain all the investor funds.

f. Keep track of all the latest developments in the target sector

Diversification is the key to having a successful portfolio. However, too much diversification can often damage new investors as it is difficult to track every movement of every industry or stock. It is, therefore, prudent for new investors to target a particular sector or segment initially to limit their exposure. Investors should keep track of all the latest developments in their target sector to avoid any miscalculations or potential losses due to a lack of information.   

g. Avoid herd mentality

Herd mentality is one of the major dangers in stock markets. When investors blindly follow some market trend without thorough analysis, it is a recipe for disaster. The risk profile and analysis of every investor are different and hence blindly copying or following an investor’s portfolio can lead to major losses. It is, therefore, always better to do your own research and market analysis to avoid making any investment decision based on some tips. 

h. Avoid putting all eggs in one basket

As mentioned above, diversification is one of the most important aspects of a healthy portfolio. Investors should avoid putting their entire capital in a single stock or sector as the potential of loss increases substantially. Diversification allows them to balance their portfolio. However, it is essential to know the difference between diversification and over-diversification as the latter also has its own set of dangers.

Conclusion

Investment in stocks has increased exponentially in the Indian market in the past years with growing interest on part of the investors as well as the chance to explore alternative revenue sources. Such investment, though lucrative, is a minefield of risk that has to be navigated with thorough information and market research. It is important for the investors to set their investment goals and take calculated risks to achieve the same through their investment in stock markets. Taking a plunge in stocks without careful planning and understanding of the market can potentially lead to drastic losses that can wipe out the entire corpus fund of the investor. 

FAQs

Is the Demat account mandatory for investment in stocks?

Yes, a Demat account is one of the primary requirements for investment in stocks.

 Is investment in IPOs safe for new investors?

Investment in IPOs provides the opportunity of entering the market right from the day they are listed on the exchange. However, in light of limited data, such stocks can be quite risky. Therefore it is essential to have a careful analysis of the fundamentals of the company to back the investment decision

What is the impact of being emotionally attached to a stock?

Being emotionally detached is one of the cardinal rules while investing in stocks. When an investor gets emotionally attached to stock the chances of losses increase multifold

Can an investor invest their emergency funds or entire life savings in stocks?

Using emergency funds or the entire life savings of a person in stocks can be highly dangerous due to the volatility of the markets. Hence, it is advisable to avoid such situations and invest only with surplus funds

Can an investor hold shares in the physical form?

SEBI has mandated the dematerialization of shares from their physical form through a notification in the year 2018. According to this notification, investors will not be allowed to transfer their shares held in physical form after 1st April 2019. Investors can continue to hold the shares in physical form but the transfer of shares through transfer deed will only be possible after the dematerialization of such shares from their physical form

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