Wondering why does the stock market always work against the direction you trade or invest in? Why is it always you who suffer huge losses while everyone around you is making profits? What is the science behind this extremely unstable and unpredictable market?
Well, the stock market has been the talk of the town for several decades now. But recently this household topic of discussion has reached new heights, especially among the young generations who have either made huge profits during the 2020 pandemic stock market crash or lost tons of money during the same.
Profit or loss, whatever may be the case, this newly acquired hobby of many needs proper knowledge or learning otherwise it soon achieves the ill-repute of gambling. I have seen several people make millions of profits in this market and I have seen the same people lose hundreds of millions in this market. That is they lost more than they ever made in one single sweep.
One specific reason is that they were so caught up in the dazzle of this market that they never actually bothered to gather info or learn the tricks that go behind the functioning of this highly dynamic and volatile field.
Another important thing to remember is that even when the market swings from one corner to another within seconds, your emotions should stay put rather than swinging along with it. The key is to keep yourself focused on the goal and let logic and calculation prevail rather than emotions.
I know I may have scared you into abandoning the stock market altogether but with a dash of luck and a bucketload of knowledge you can easily be the next Rakesh Jhunjhunwala of this generation.
Well, worry not!
I am not asking you to dive head over heels into the field and drown yourself in it. It’s better to start with small steps. And as a beginner, you can start with the tips and tricks mentioned in this article, put them into practice, and take it up a notch one step at a time from there.
Here’s a list of the top 10 share market tips we recommend profusely:
Set Your Financial Goals
The foremost important tip for the stock market is to start with defining your goals.
Before commencing, ask yourself this: Are you looking to create a nest egg for retirement? Or then again, are these speculations being made to raise a corpus for putting a child through college?
Your financial goals help you to understand the duration of your stay in the market, whether to trade or invest, whether go for intraday trade or long-term investment, and the risks that you are capable of taking.
Know Your Risk Tolerance
Considering the highly volatile nature of the stock market, it is only fitting to comprehend the risk involved and your tolerance towards that risk in any investment or trade. Risk tolerance differs from investor to investor and trader to trader and hence, it becomes a very significant part of the investment journey.
Risks such as liquidity risk, inflation risk, market risk, concentration risk, etc. indicate losing a piece of your invested capital or exposing your principal amount because of different reasons.
Generally, as a rule of thumb, Higher Possible returns = Higher Risks and vice versa.
Thus, it is important to understand the level of risk you are comfortable at and if you push beyond that limit, you might end up making emotional frenzied decisions such as panic selling at an unfavorable time.
Answering these questions will help design an investment plan which is tailored for you.
Diversify Your Portfolio
Maintaining a well-balanced portfolio and diversifying equity investments across different sectors and industries better manages the impact of a market swing because then the downtrend of one sector can be offset by the uptrend of another.
Smart investors are constantly seeking out ideas to increase their returns while reducing their risks. Of course, eliminating risks altogether is not realistic, but creating a portfolio that limits risk exposure and offers an astounding chance to grow wealth falls under the realm of imagination.
The portfolio must be diversified across various asset classes such as debt, commodities, real estate, gold, equities, etc., and maximum diversification within each asset class as well.
Various ways of diversification include:
Across sectors: Diversification here helps minimize the crash of one sector with another sector.
Across geographies: Investing in companies from different countries helps reduce the impact of poor political and macroeconomic situations of one country on your portfolio.
Across market capitalization: Make sure to buy stocks of large-cap, medium-cap, and small-cap companies as well. This is to take benefit of less risk of large-cap companies and higher returns of medium and small-cap companies.
Thus, diversification is one of the most important tips for beginners in the share market which should be learned beforehand.
Be Realistic About Your Profit Goals
A strategy doesn’t have to bring in only profits to be profitable on the whole. Numerous traders and investors win only 50% of their trades. Nevertheless, they lose so much less than they make on their wins. Hence, ensure that the risk on every trade and investment is restricted to a particular level only, and that entry and exit points are explicitly defined and recorded.
The internet is brimming with accounts of stocks that gave over 100% returns. While these accounts may be valid, they are also uncommon and unpredictable. Normally, one can hope to acquire returns in the scope of 15-25% over the long haul.
Consequently, while putting resources into stocks, make sure that you keep your return assumptions genuine and dependent on the risk component of the investment.
Stay Cool – Trade Logically Not Emotionally
“Success in investing doesn’t correlate with IQ … what you need is the temperament to control the urges that get other people into trouble in investing.”
Warren Buffet is pointing to traders and investors who let their emotions, not their guts, handle their investing choices. In reality, emotions-triggered trading overactivity is perhaps the most well-known method in which investors disturb their portfolio returns. Many a time, the stock market challenges your nerves, but as a day trader or an investor, you need to figure out how to keep fear and greed under control.
Thus, your decisions should be dictated not by emotions rather by logic because decisions based on emotions are mostly counterproductive.
No Penny Stocks And No Word Of Mouth Stocks – Bye Bye To Rumours
Most investors look for stocks with low prices thinking they will give huge profits but STAY AWAY from such penny stocks. Penny stocks are most often illiquid, and odds of hitting a jackpot are usually quite bleak. Also, don’t be fooled by stocks that are trending based on word of mouth or rumors.
As mentioned earlier, your decisions must be guided by due diligence, research, strong company performance, and significant fundamental and technical analysis of the stock.
Another advantage of this share market tip is that the companies with solid performance and fundamentals can readily withstand the market fluctuations and give greater odds of better profits over the long haul.
Avoid Using Borrowed Money For Trading/Investing
Since lack of capital is one of the most prevalent issues in the stock market, as a new investor/trader, it can be tempting to use leverage, that is, the borrowed money readily available as a margin facility by the stockbrokers these days.
While this may seem like an excellent way to get into the business, it can be incredibly dangerous and the risks can far outweigh the benefits of using this leverage. Since investing or trading cannot be a sure thing, you can end up losing all your investment money in one go. Additionally, you will also have to find a way to cover the debt you now owe to your broker.
Therefore, beginners should avoid it at all costs due to the high chances of severe losses. You can use this margin facility once you gain some experience.
Stay Away From Herd Mentality
Beware of not becoming a victim of herd mentality, where you invest influenced by the activities of other investors instead of logic.
In March 2020, most people panicked during the crash of the stock market due to the pandemic and lockdowns worldwide and sold stocks at losses which was followed by even more investors. Although this appeared as the best thing to do then, it was an uninformed, emotional decision based on a stressful situation.
Because within a few months, markets started to recover and stocks of fundamentally strong companies were on course to bounce back. However stressful it was to watch your portfolio’s value plummet, the proper analysis before selling could have curbed the losses for a lot of investors.
Most people who react to the volatile conditions of the market, invest more during market surge when there is strong speculation of markets rising even further. And they begin panic selling during a couple of market fall sessions.
However, you may end up buying or selling stocks that are not the most favorable if you follow others without proper thinking and deliberations. Thus, make sure your decisions are not guided by such factors.
Knowledge Is Power And Knowledge Is Profit
Along with the knowledge of the fundamentals of the trading process, day traders and investors should also keep up on the most recent news and events of the stock market that can influence stock prices such as the central bank’s interest rate plans, economic policies and conditions, monetary standpoint, etc.
Thus, do your homework, create a list of stocks to trade in, stay informed about the markets and your chosen companies, regularly check reliable financial websites, and observe business news.
This knowledge is quite literally a form of profit for you so don’t just invest in stocks but also in this knowledge!
There are countless stock market courses out there that train you to handle all the nuances of the stock market. Courses, starting from only 1 month to 1 year depending on the level of expertise and field of the market you are looking for, teach you to tackle stressful and volatile situations.
Understand The Basics Of The Market
Taking a quick look at the manner the stock markets have reacted to the pandemic, it has been no less than a roller-coaster ride. With huge market instability and a questionable outlook, most people in the stock market found themselves grasping at straws to settle on the right investment decision for them.
A comprehensive understanding of how the market functions and thorough research and analysis are vital to withstand the volatilities and risks associated with this market.
Therefore, to be in better control of your financial goals, again the need to go through the learning of the technicalities arises. There are many institutes providing stock market courses such as The Thought Tree (T3) which can better prepare you with the basics and the advanced knowledge of this uncertain market.
Such courses teach you how to drive certainty out of the uncertain conditions of the market.
Remember, it is not a gambling arena where you can take chances. You are supposed to make informed and logical decisions, throwing away the speculations, and growing into an expert over time.