Additional cash savings, higher free time or the need to create a second income are being seen as potential reasons for the sudden interest in stock market investments in the recent months.
As per an estimate, about 12 lakh new investors opened demat accounts with the Central Depository Services (CDSL) alone in March and April.
While investing in the stock market is easy and happens at a click of the mouse, for getting sustained returns an investor must follow some do’s and don’ts.
Here is a list.
Do’s
Invest systematically
It is common for first-time investors to feel the fear of missing out on the spectacular market return in the past few months; however, this should not be taken into any consideration while making investments.
It is always a good idea to invest small amounts of money regularly, rather than making a lump-sum/one-time investment.
This is because a systematic monthly investment gives investors the chance to average the purchase price over time and worry less about the fluctuations (almost similar to volatility) of the market.
Conduct thorough research
Similar to the research that an individual conducts during purchase of real-estate, the research in stock market is also necessary.
It is easy to be fooled or attracted to making an investment in the so-called ‘hot’ stock by looking at low quality opinion, posts and information.
This must be completely avoided and either one must conduct personal research or approach an advisor who can assist with the same.
Diversify investments
It is never a good idea to put all eggs (investments) in one basket (stock or market). It suggests that investors may face lower risk by investing in different investments/assets.
To achieve a diversified portfolio, look for asset classes that have low or negative correlation, so that if one moves down the other tends to counteract it.
Also, stocks are not the only assets to consider, one can also consider investing in Exchange-traded Funds (ETFs) and real estate investment trusts (REITs).
The act of diversifying across assets yet keeping the portfolio simple is a skill that an investor must have.
Choosing the right broker
There are two types of brokers: Full-service brokers and discount brokers. As the name suggests, full service brokers routinely offer advice and recommendations integrated with the broking plans.
Discount brokers generally leave it to you to make investment decisions. While your returns will be predominantly driven by the individual investment chosen, partnering with the right broker can positively impact performance and help avoid falling victim to delays, glitches, scams and frauds during transactions.
Don’ts
Speculation
Speculators tend to make decisions more often based on technical analysis i.e. based on share price action, rather than on fundamental analysis of an asset or security. Speculators depend too much on luck – similar to gambling.
The level of risk associated with speculation is too high. A good investment strategy involves cautious and disciplined attitude as opposed to the baselessly aggressive attitude that speculation demands.
Participation in get-rich-quick schemes
Obtaining and managing wealth is usually attached to effort, patience and growth over time. Get-rich-schemes most likely turn out to be ponzi schemes or scams. Any promises of return that seem impractical must be avoided.
Timing the market
The stock market, as most people know, is cyclical. There are periods of great growth, as well as those of great stagnation and even crashes. In theory, timing the market makes sense, but is difficult to practice in reality.
This is because several factors make the market move up, down or sideways. The best way to succeed in the stock market is to develop a sound long-term investment strategy, balanced portfolio and not worry about the short term volatility.
(Written by Sankarsh Chanda. Author runs a SEBI licensed investment advisory.)
Disclaimer: The views expressed above are solely of the author and not those of ETV Bharat or its management. Above views must not be construed as investment advice and ETV Bharat recommends readers to consult a qualified advisor before making any investment.
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