After the incredible upsurge of world equity indices, we are all fascinated with the idea of investing in stock markets. But there are steps you should take before starting your stock market investing journey. Follow the following stock market investing steps, and you will not go wrong:
- Determine Your Asset Allocation and Risk Profile
- Determine Whether You Are a Trader or an Investor
- Avoid Leverage
- Avoid Following the Herd
- Avoid Derivatives
- Open an Online Trading Account with a Reputed Broker
- Develop Awareness of the Different Types of Trades
- Avoid Buying Penny Stocks
- Diversify Your Portfolio but Avoid Over-Diversification
- Ensure Appropriate Stop-Loss Levels accompany your Trades
- Systematic Investment
- Have Realistic Expectations
Determine Your Asset Allocation and Risk Profile
First, analyse how much money you are comfortable allocating to equities. The allocation should be according to your risk tolerance. You should invest only those funds you can safely spare for which you do not have an immediate need. You should be aware that stock market investing means the risk of incurring losses in the short term. The first step of your journey is to open an online trading account.
Determine Whether You Are a Trader or an Investor
If you are looking to make money in the short term and want to trade frequently, there is a risk that you may incur losses due to short-term fluctuations. Stock market investing provides the maximum return when you invest for the medium to long term. You can maximise your returns by staying an investor. You should start investing in stock markets only after grasping the basics of stock market investing. Stock markets are not money-making machines. You must understand first the concepts of price-earnings ratios, return on investment and dividend yield of shares. The first step is to open an online trading account.
Don’t borrow or trade on the margin, as any potential losses get magnified by using leverage/ borrowing. Your returns will be maximised when the stock price rises, but any unexpected downside will mean additional losses. On top of your stock losses, you will also have the liability to pay interest on your borrowings.
Avoid Following the Herd
Choose your stocks after careful analysis. Do not buy stocks on the recommendations of your friends or neighbours. Follow a contrarian philosophy and buy your selected stocks when the prices are low and sell when they are high.
Start with simple trades in the cash market. Avoid options and future trades. Until you improve your expertise in the markets, refrain from derivative trading, as these trades can magnify the effect of your losses. You can make money in cash market trades without assuming additional risk after you open your online trading account and start your online stock trading in the cash market segment of equity markets.
Open an Online Trading Account with a Reputed Broker
There are many reputed online brokers, offline brokers, and discount brokers. Many discount brokers offer brokerage rates of Rs. 20 for intra-day trade. Any brokerage does not charge delivery trades. Compare the services of different online brokers and open a trading account with the one selected. There are, of course, other charges such as depository fees, penalty interest charges if you delay the cash settlement for your trades etc. You must get the complete list of all charges from your broker so that you are not caught unawares by the charges levied. Open your online trading account today to start your stock investing journey.
Develop Awareness of the Different Types of Trades
You should know the different rules that govern various types of trades and their settlements, which include:
- Delivery trades which settle on the trade + 2 days,
- Intra-day trades where the net difference between the purchase price and sale price is received or paid by you on the trade + 2days.
- T2T trades where you cannot make an intra-day trade and only buy or sell outright for delivery.
- BTST (Buy today and sell tomorrow) and STBT (Sell today and buy tomorrow) trades.
- Intraday Margin order, Bracket Order, Limit Order and Cover Order
You must also understand that there are different classes of shares available in the market, including; A shares, B shares, Z shares etc. Along with your study of stock markets, open an online trading account with a reputed online broker and start your online stock trading today.
Avoid Buying Penny Stocks
Penny stocks may seem attractive because of their low valuations. It would be best to avoid the temptation to buy them because of their low absolute values. Their values are low because they have no intrinsic value most of the time. In the post-Covid resurgence of the stock market, there have been cases when some penny stocks have risen 200-300 times. But please understand that this is not a universally applicable rule.
Diversify Your Portfolio but Avoid Over-Diversification
Buy a maximum of 10-15 stocks into which you have conducted careful research. This avoids stock-specific risk. Over diversification will dilute overall portfolio returns. You should ensure that your stocks are diversified by market capitalisation, sector and security in your portfolio. You can do this easily through your online trading account when you start online stock trading.
Ensure Appropriate Stop-Loss Levels accompany your Trades
When you place a stop-loss limit on your order, you limit the amount of the maximum loss that you will incur on specific trades that you place in the market. You can do this easily with an online trading account when you start online stock trading.
Invest your money systematically. This way, you can benefit by bringing down the average cost of investing. If you invest in a lump sum and the market comes down, you will potentially lose. If you systematically invest small amounts over a period of time, your weighted average costs are lower, and you will earn higher profits.
Have Realistic Expectations
Go into stock trading with the realistic expectation that you will not turn a profit on every trade. You should avoid emotional responses to your trades. This will help to reduce your overall portfolio losses.
Best of luck to your journey in the stock markets with the opening of your online trading account and commencement of online stock trading.