What first-time investors should know before investing in stocks

Highlights

• Stock investments are always subject to market risk.
• Learn to swim or keep afloat as you hone the skills required in the stock market.
• Patience is key to handle downswing or upswing in the market with ease.

For first-time investors, the stock market looks lucrative as most expert advice seems to suggest easy returns. However, in every stock market-related product, it is mentioned that ‘stock investments are subject to market risk.’ Thus, it is crucial to understand beforehand the stock market, its participants, products, processes, and the most important of all, the mindset.

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What should be the mindset of a first-time investor?

A stock market is a place where everyone can enter and transact after fulfilling two basic requirements: one is to have money for investing, and the second is to have KYC documents to open an account. The initial goal should be to keep yourself afloat through the thick and thin as you start trading, which is to understand the various market activities, companies that are listed or about their businesses, understand the fee structure, and the process of buying or selling stocks. Once you are ready and confident, dive into the depths of the market.

Don’t rely on the knowledge or skills of others for stock trading. You should be able to handle the challenges by yourself. Take expert advice only when you are sure you need one. Here, we discuss nine things to keep in mind before entering the stock market.

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Planning in advance

First-time investors get attracted to the stock market because of its easy entry process and the lure of big money. But it is only in the books. First-time investors should surely try this fascinating world of investment but with a goal in mind. So, planning with a purpose is recommended.

Diversify the portfolio

Many people who start stock trading at a young age do so because of trends or peer pressure. Thus, they lack proper knowledge and invest randomly. It is risky. One super-easy rule to follow here is to diversify the portfolio, and the way to do it is by starting with Exchange Traded Funds or Mutual funds. These products are already diversified and managed by experts and therefore are less risky but have complete exposure to the stock market.

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Don’t borrow money to invest/start with extra money

Investing in the stock market in an IPO, mutual fund, or stocks with borrowed money is not a good idea. The market is influenced by many factors, with each having varying levels of risks. By nature, the stock market is uncertain, and this uncertainty itself is a significant risk. So, always invest when you can afford to lose money if the outcome doesn’t go your way. And one should also be prepared to stick to a particular stock for a longer duration if the sale scenario is unfavorable.

Don’t take advice blindly

There is always a first time for everything. However, one should not invest in stocks blindly. A better way is to start with a small amount after taking advice and simultaneously use your knowledge.

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High turnover is bad for actual returns

Frequent buying and selling of stocks may eat up the returns due to the commission to be paid. So, investors should be wary of trading unless they don’t need returns.

Stay longer to reap capital gain benefits

If you have remained invested for more than a year in a particular stock or portfolio, then the gain accrued is called ‘long term capital gain’ for taxation purposes if sold.

The long-term capital gain ranges from 0% to 20%. Conversely, if it is less than one year or up to one year, the investment gain is considered ‘short term’ that is taxable at the ordinary income slab and generally may be high in comparison with the long-term capital gain tax rate.

Besides, the capital gain can be adjusted with the capital losses to avoid taxation.

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Don’t play on emotions or herd actions

Many times, investors act on emotions. In that case, even if the company is not performing, they keep holding its stocks. The idea should be to keep a stock that is performing well and has growth prospects. But if the CEO changes or the company faces contract cancellation or other issues, investors should evaluate the situation to avoid following the herd mentality.

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Stay updated on the market and evaluate and update portfolio regularly

Direct investment in the stock market demands time and efforts to reap the returns or avoid losses. Hence, it is the prime responsibility of the investors to remain updated to get the best return on invested money.  

Patience is the key

Another important aspect is not to love the company by its name but with its fundamentals. So, patience is the key to playing in the stock market.

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Bottomline

There are several avenues where one can invest money. To cut the story short, investment is good when done with planning and due diligence. To avoid unnecessary losses and make gains on the investment, these few tips could help the investors.