12 essential things you must know before investing in stock markets.

Written by Aryan Agarwal

May 12, 2020

No one knows what will happen with the stock market in the short term, but in the long term, the stock market always gives a positive return.

Historically, NIFTY has a CAGR of 11.1% in the last 20 years, which is pretty good return considering that there were a few stock markets crashes as well where people thought that stock market is coming to an end.

You should always invest in the market for the long term with a time horizon of a minimum of 10 years. You should never invest the money that you are going to need that money before 5 years.

The things to know are: –

Never jump blindly into the stock market

A lot of times it happens, and it might have happened to you that while speaking to a friend and/or coworker, they tell you about the stock market and how the stock market has helped investors earn huge money.

You may not have spent in the current market, but after hearing all the things, you think about purchasing a couple of shares.

But if the industry simply to stay in a mainstream manner, you’ve landed into the wrong motive.

You need to purchase a share only after obtaining a simple understanding of how to works and the economics behind the business.

You should also look at the company’s financials before buying it.

Not having an Emergency Fund

Always keep 3-6 months of expenses in a savings account or liquid fund or any other place where you can easily access the money whenever needed before investing your money in the stock market.

This is extremely crucial as you don’t want to withdraw your money from the stock market when the stock market is down and so is your portfolio.

You should make sure that the emergency fund you build shouldn’t be sitting idle, but you need to invest in it something that is relatively liquid and earning decent interest.

This will allow you to have peace of mind if things ever do go wrong.

Emergency Fund before Stock market

Be BAD DEBT free

Before investing, you should try to pay off any ‘BAD’ DEBT.

BAD DEBT means that any DEBT that has a high-interest rate or a DEBT that doesn’t create wealth and is a liability.

These BAD DEBTs can be very dangerous for you as these DEBTs are designed to make money off you and will increase. These DEBTs will also cause you to be in a DEBT trap where you will not be able to pay off the DEBT because it has become too high to be sustainable for you.

The most prominent example of BAD DEBT is Credit Card DEBT, and it will destroy your money if you misuse this DEBT.

The stock market is not a money-making machine

You might have heard the stories about several investors that made their fortunes throughout the industry. Many consider that the stock market is similar to a profitable machine, which may turn them into a millionaire within a short time period.

A lot of people have indeed earned some decent money from the stock market, but almost all of them had a ton of experience and knowledge about the markets and made informed decisions.

If you want to earn in the stock market, you will have to do the same and educate first.

Lots of men and women forget that many people have lost their whole wealth and savings in the stock market, though others have made the markets their income generators as they are good at investing.

Educate yourself, handle basics first

Before making your initial investment, you should take some opportunity to learn about the business and the underlying fundamentals of it.

You need to buy a wonderful company that will exist for a long time generating money for you.

Your focus depends on individual companies that you’re investing in and also the connection with the broader economy as well as the elements which drive their value.

Some critical areas which you need to know before entering the market place are:

  • Popular Techniques of Stock Choice and Time, such as technical and fundamental investigations
  • Forex fundamentals, principles, compliances and language as market purchase forms such as exchange orders, limit order, stop market orders, stop-limit orders, trailing stop-loss orders, along with other forms widely used by investors, and gross income needed if you would like to exchange in F&O.
  • Gain some knowledge about the marketplace and its connection with the market like the market connection with inflation, GDP, financial deficit, crude costs, rupees values from the buck.
  • People today eliminate money in the markets since they quickly jump into the marketplace without understanding the investment and economic market cycles.
Educate yourself for the stock market

Invest only your surplus funds

The biggest mistake most traders make is that they invest more money than they can afford to lose.

Personally, I don’t believe this point, but if you don’t understand the stock market and still want to invest, you will end up losing money.

Investing in the stock exchange is risky, which usually means you may potentially get rid of everything. Some will say that the dangers about the total marketplace as a systematic risk you can not prevent by diversifying your portfolio, even though some risks are stock-specific which you could avoid.

You have to determine your risk tolerance contemplating your age, fiscal strength, retirement target, and so on, and so should choose the hazard.

If you would like to participate in the stock exchange, then just invest your excess funds that you’ll be able to manage to lose. Investment is made to make more cash, but don’t invest all of your emergency money in the stock exchange.

Avoid leverage

Leverage means using borrowed money to execute your stock orders. It sounds fascinating as you can learn a lot of money, but you need to remember, you can lose all your money as well.

Leverage is like a double-sided sword, it can cut you as well.

Leverage is, hence, an instrument, neither great nor poor. But, it’s best used once you get expertise and confidence in your decision-making skills. So limit your danger whenever you’re starting out to make sure you can profit over the long run.

Avoid herd mentality

Unlike a lot of investors, you need to steer clear of the herd mentality that’s affected by the activities of your own neighbours, relatives or neighbours without assessing the present info and underlying shares.

Therefore, if everyone about is investing in a given stock, the trend for prospective investors is to perform precisely the exact same.

However, this approach is likely to deteriorate in the future in case you haven’t selected the inventory by careful evaluation. Consequently, if you genuinely don’t know about the stock, never measure in.

Before buying a company, you need to know about its business model and how the company earns money.

It is crucial to invest in companies which are simple for you to comprehend, particularly as you are just beginning. Put money into a company instead.

Herd_Mentality

Diversify, but refrain from over-diversification

You should never put all your money in a single stock or a single sector of industries.

You should invest in multiple companies in multiple sectors so that you don’t put all your eggs in a single basket.

Additionally, avoid more volatility, as growth in the number of shares up to a particular limit do assist in simplifying the danger proportionately, but past a certain number of shares that your investment can not get the proper expansion period.

Don’t try to time the market, follow a disciplined investments approach

The vast majority of investors attempt to time the current market, something which financial planners have been warning them to prevent, and so shed their hard-earned cash in the process.

Nobody can efficiently and consistently time the market by grabbing the bottoms and tops over multiple company or stock exchange cycles. It’s possible to spend over a time small amounts of cash to average the sector and can find the advantage in the long run.

Investors who invest money in stocks systematically have amazing long term returns.

Consequently, it’s wise to have patience and adhere to a disciplined investment approach aside from maintaining a long-term comprehensive image in mind.

Don’t let emotions impact your investment

Separate your emotion out of any specific stock because many investors wind up losing money in the stock exchange because of their inability to control feelings.

Eliminate the anxiety and jealousy cycle. Don’t invest in some insecure unknown inventory lured by its own previous fantastic yield without knowing the danger involved which will cause one to suffer from the loss.

In a bear market, command your anxiety and do not panic and market stocks at reasonable rates.

Therefore, greed and fear will be the worst feelings to think about after investing, and it’s better to not be directed by them.

Have realistic expectations

Hoping your investments will grow isn’t incorrect, but you might be heading for trouble if your fiscal aims are based on unrealistic assumptions.

For example, tons of shares have generated greater than 100 per cent yields during the fantastic bull run of years.

But, it does not indicate you ought to always anticipate the exact same type of return in the securities markets. Should you think stocks in your portfolio are somewhat overvalued, it’s much better to change to comparatively undervalued stocks.

Conclusion

If you know and follow these simple points, you will surely do great once you start investing in the stock market.

It is essential to observe your investment and examine it occasionally as any significant event occurring in any part of the planet has an effect on our financial markets. Additionally, any information or fiscal occasion related to a specific market or business influences that stock.

I will guide and help you with that as well in the upcoming article.

Being careful with your money is never wrong. Your money is significant and maybe these pointers that I gave you, will help you avoid losing money in the stock market.

Stay tuned for my next article to know how to invest money in the stock market.

Let me know if you have any questions in the comment. I’ll answer all your doubts.

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