A few days back, my 22-year-old niece, who had just got her first job, expressed interest in learning more about investing in stock markets. She wanted some serious advice from me regarding how to go about the process. Of course, I gave her a detailed idea of fundamental and technical analysis. I suggested some online courses that would give all the details regarding how to read charts, analyze them, and make decisions.
Think out-of-the-box!!
However, I could not end the training there. The question that stuck to my mind was, shouldn't I also educate her about investment-related issues that are not taught in books or courses and come only with experience? So, given below are seven key pointers that we all should keep in mind while putting our hard-earned money in the stock markets.
Key-pointers
- Understand the trend - As an investor, you should understand the trend of the financial instrument in which you are putting your money. For instance, you may have a stock in your portfolio that may have gone up to a significant extent, and you may think of booking profits, assuming that the stock is either overvalued at the current level or will shortly show a reversal. However, in such cases, it is essential to follow the trend to understand how the stock market is today. Since the trend is still showing an upside, it may go further up. It is better to wait for a reversal indication and confirmation before selling it off or taking a short position.
- Note the earnings - It is always better to go for stocks that are showing good earnings in their financial data. The first step is to check the EBITDA (Earning Before Interest Tax Depreciation and Amortization), then the PBT (Profit Before Tax), and PAT (Profit After Tax). Ideally, if the stock is exhibiting consistent losses over the quarters or years, why go for it? Wait till the earnings turn positive unless there is a sudden or temporary reason for poor earnings, which has a good chance of recovery in the near future.
- Proper portfolio allocation—Never put all your funds into a single stock or asset class. If today American and Asian stock market shows that a particular instrument is not performing well, your entire corpus will suffer losses. It is always better to design a portfolio that balances risk and return, depending on your own risk appetite and financial plans. Allocation across different stock and asset classes will ensure risk control.
- Aim for the long term—In the financial market, long-term investment should be the ideal outlook. Buying today and selling tomorrow may or may not always yield returns. In fact, staying invested means using the power of compounding to multiply your money, which is bound to give you good returns a few years down the line. It is also better to select fundamentally strong stocks that have the potential to yield good returns over the years and will help you build your portfolio for the long term.
- Control emotions—It is a well-known fact that people very commonly fall prey to greed or lack of financial control and planning when they invest in worldwide stock markets. Earning profits once, instigate more and more with the hope of more profits. They forget that one cannot expect to be consistently profitable at every trade, and thus, they end up losing a large amount of their hard-earned savings. Therefore, it is crucial to have emotional control while investing in financial markets.
- Do your studies—Always choose assets or financial instruments that you have a thorough knowledge of. This will help you understand which will suit your needs and give you a better opportunity to earn profits as per the condition of the Asian and American stock market today. Good core knowledge will help in identifying opportunities to invest and stay ahead with patience and conviction. Thus, you will not depend on others to do the research and analysis and act according to other's inputs and advice, which mostly proves risky.
- Plan well—Always ensure that you plan your investment strategies well and follow them thoroughly while executing them. Planning and execution go hand in hand. Therefore, your planning should include your financial goals and risk appetite, after which your execution strategies should include risk management and a clear understanding of every step.
Conclusion
The above seven pointers are not very tough to follow in worldwide stock markets, but they ensure that your investment journey goes well, helping you grow your corpus and finally gain and spread financial knowledge.
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