Investing in the stock market can be intimidating for many investors as it is a risky investment where you can lose money if you don’t know what you are doing when selecting stocks to buy. You need to know things to avoid and why investors lose money in the stock market.
You need to start investing now so that you can grow your wealth faster than most people due to the compound interest that we talked about before. The sooner you start, the more money you can earn, and let me tell you, numbers don’t lie.
I have made this beginners guide on How To Invest In Stocks for you so that you don’t make mistakes like I did when I started investing.
How To Invest In Stocks
Understand your ‘WHY’ and Goals
You need to understand why you want to invest in the stock market and based on your way, you need to plan and make goals.
You need to know what you want for it.
The stronger your ‘why’ will be, the more dedication and persistence you will have in persuading and achieving your goal.
Your ‘Why’ will become the base of your motivation and its the most important thing in your investment career.
In this case, your investment goals should be related to why you want to invest and what you what to achieve from it like
If you want to debt-free, then you need to save your money and pay down your debt using that money.
You can use 2 methods to become debt-free.
The debt avalanche method involves paying the minimum balance on all your debt payments and using the remaining balance to pay off the debt with the highest interest rate.
Once you pay off the highest interest debt, then move on to second highest using the remaining money which will be higher as you have less debt to pay off.
This strategy is the fastest way to be debt-free and allows you to hay off the worst debts according to the interest rates.
As you eliminate the highest interest debts first, you are left with more and more money.
The debt snowball is a different concept where you categories and pays off the smallest debts first so that you can get the satisfaction of achieving something and more likely to continue paying off your debt.
This may not be the fastest way but research shows that this method is followed through by people because the excitement of smaller debts being over as paying off large debts first can cause people to lose confidence and leave it halfway.
Which method you use is up to you and how you can manage you and your money. The debt avalanche is most efficient but debt snowball is more likely to be completed.
Short term or long term gain
You need to figure out if you are trying to invest for the long term capital gains or short term gains.
According to most experts, you are more likely to earn money if you stay invested in the market for the long term due to compound interest kicking in but in the end, the decision is yours to be invested in the market or not.
Planning for retirement or want to buy something?
Have you decided about your retirement yet? You may think I am crazy talking about retirement so soon already but trust me, the sooner you plan for it, the better position you will be in to think about retirement and save as it takes you less money when you have more time to build your wealth.
You generally don’t want to invest in the market for fewer than 5 years as there is a risk of losing money in the downturn.
Before investing any money in the stock market, you need to have money to invest.
A study by Fidelity Investments found that around 88% of millionaires are self-made.
So, what do you think, what was the first thing that these people did were? They lived below their means and saved as much as they could to invest the remaining money in the stock market and their businesses.
Always try to save at least 10% of your paycheck (15-20% recommended) and divide that money into half and put that money in an emergency fund and the stock market.
This will help you to have cash on the side if there is any temporary income disruption or any financial emergency.
This will also keep you from panicking if you invest in a risky investment.
You can put your emergency fund in a savings bank account or FD/RD whichever is convenient for you.
Selecting a brokerage
There are two types of brokers in India namely full-service broker and discount brokers.
Full-service brokers try to provide you with all the features that you can possibly need. They charge a higher fee from you due to the services they provide. This can be great for someone just starting out in the investing as few brokers provide you with intraday calls and preferred trades to get you started.
Full-service brokers like HDFC, Motilal Oswal, Kotak, and more charge you commission in the percentage of each executed trade. They charge you with 0.3-0.7% per trade depending on the broker as they provide you with a trading platform as well as advice for investments.
Discount brokers, on the other hand, provide you with only a few services like an online trading platform and a couple of other services. They charge you less for it and are generally recommended for people trading with a large sum of money and have the knowledge of the stock market.
You can select any one of them but I would recommend that you start with a full-service broker if you are just starting out and have no prior knowledge in stocks.
If you are experienced and have confidence in yourself, you can use discount brokers as well.
Discount brokers like Zerodha, Upstox, and more charge you a flat fee on every executed order. Generally, they charge 0.01% or RS. 20(whichever is lower) per trade depending on the broker as they provide you with the trading platform but no advice on investments.
You can check chittorgarh.com which compares all the brokerages there are in India. you can select whichever you like the best.
Find A Mentor
Finding a mentor in your early learning stages can make or break your investing career as you can learn and avoid losing time and money because of the knowledge your mentor imparts you.
Your mentor can help you with the stock selection process and educate you on basic things faster than a book or a video.
But this only helps if you have a good mentor that is willing to help you without any financial gains. Try to find someone that will be fit for you.
Start with Mutual funds and ETFs
When you are just starting out, chances are that you don’t know much about investing in stocks.
Learning to invest takes time as it’s a huge topic, so to avoid wasting time, you can start investing with mutual funds till you educate yourself enough to switch to stocks.
Mutual funds are a collection of stocks that are selected by experts in the finance field working for huge companies. This will initially remove the burden of selecting the stocks by yourself.
The benefit of investing in mutual funds or ETFs is that you only need to set the amount of money you want to put into that fund and you are good to go and do other things with your life.
Mutual funds also help you as you don’t have to worry about diversification since all the funds have a diversified portfolio to avoid exposure and losing all the money due to a single stock.
Stick with Index Funds
there are several mutual funds that you can select and if you are lazy to select mutual funds as well, you can select index funds.
An index fund is just the fancy name describing a mutual fund that tracks the index of your countries like NIFTY 50 and S&P 500 index. Companies charge low fees for index funds as the professionals don’t have to make any decision and only have to allocate assets to the index.
While you can’t beat the market using index funds but you will never underperform the market either. Thus index funds are considered to be the best friend of new investors.
The full form of DCA is a dollar-cost average and it is a process of buying into an investment position gradually. That means if you have money to invest, you divide that money and invest it over a longer time frame.
This helps you avoid any rash decisions and you won’t time the market, therefore you are safe from market price fluctuations that are pretty common in the stock market.
DCA naturally works great with mutual funds and index funds using SIP (Systematic investment plan or SIP for short). This also eliminates the “when” question as you are investing consistently over a long period of time.
Educate Yourself First
Educating yourself can be tough in the stock market as it is a huge topic that requires a lot of time to learn. I always recommend using Zerodha Varsity to educate yourself when you are just starting out as it provides extremely valuable information in a beginner-friendly way.
Fortunately, with the help of index funds and mutual funds combined with dollar-cost averaging, you can start investing immediately.
But if you want to move beyond that, use Zerodha Varsity first.
Come up with an investment plan that is appropriate for you. Are you currently a risk-averse, conservative investor, or are going to be aggressively attempting to beat the market? Are you currently investing and looking for the long run, or are you currently investing and seeking to procure prosperity for generations?
To become a fantastic investor, you will have to surround yourself with investment specialists and find out all that you can.
The more you know before you start investing, the lower the quantity of danger you are going to be carrying on.
Try to learn value investing and Rule #1 investing for the best results.
Invest in Individual Stocks
when you think you have educated yourself and gain the confidence to invest I stocks, be sure to invest gradually.
You don’t have a feature for SIP on stocks and you will have to do it manually, so try to make a habit of it from the start.
Since you already own mutual funds, try to avoid investing in the same stocks that your money manager is investing in to prevent overexposure in a single share.
Try not to overload on a single stock, i.e don’t invest more than 10% in a single share.
Once you gain experience, then you can bend this rule a bit.
Once you start investing, never forget to diversify your investment.
Diversification will help you a lot as it will protect you from any bad investments that you make while learning about the stock market.
Most investment professionals agree that, although it does not guarantee against loss, diversification is the most important component of reaching long-range financial goals while minimizing risk.
Your portfolio should contain mutual funds, individual stocks, bonds, and other types of investments as well.
Starting to invest is a big step but as soon as you take that first step, the rest of the things gradually become easier to achieve.
I hope that you will start investing in your bright future and earn money from it from the moment you read this article.
If you can’t find a mentor, feel free to contact me on my mail [email protected] or comment below, and I’ll surely get back to you.